M&A Stakeholders Say These Factors Are Non-Starters for Buyers Eying SUD Providers

M&A experts predict 2021 will be filled with behavioral health deals, as investors and strategic buyers have fewer viable targets to chase in other industries. 

But not every provider is created equal, especially in the substance use disorder (SUD) space. To be an attractive acquisition target, providers must prioritize clinical care, utilize robust internal compliance programs and button up their operations.

Just ask Todd Rudsenske, partner at Webster Equity Partners, a private equity firm with various behavioral health investments. That includes in SUD providers like BayMark Health Services, one of the nation’s largest providers of medication-assisted treatment (MAT), and Discovery Behavioral Health, one of the industry’s most active acquirers last year. 


When asked what type of SUD providers Rudsenske is interested in, he said it all starts with clinical care. 

“What’s the clinical model?” he said. “And is it advancing care in a community that results in outcomes that are guided by, again, the right clinical care?”

Rudsenske made those comments during a recent American Health Law Association (AHLA) webinar put on by AHLA’s behavioral health task force and business law and governance practice group. The virtual even covered growth strategies and considerations for providers in the SUD space.


In addition to sharing the type of acquisition targets Webster is interested in, Rudsenske also went over the PE firm’s turn offs. 

He even gave an example: Prior to joining Webster, Rudsenske was introduced to a treatment provider that considered itself an attractive target. However, upon scratching the surface, Rudsenske found that financial statements revealed a different reality. 

The company spent more on customer acquisition than it did on clinical care, with about $9,000 going to advertising and recruitment efforts, and only $6,000 or $7,000 to clinical care.  

“That didn’t seem right to us that you would spend more money working to gain a customer than you would actually spend on the clinical care for them,” Rudsenske said. “There’s things like that, that you look at and say, ‘Does this make sense?’”

In addition to a provider’s care model, Rudsenske says he also looks at its management team and outcomes, as well as its engagement and patient return rates.

But even if a provider is solid in all those areas, deals can still go south, according to Kate Bechen, partner at Husch Blackwell, LLP, who also spoke on the recent AHLA webinar. 

“I just had a deal … that came to a quick end because a pretty significant compliance issue was discovered by the potential buyer,” Bechen said. “We wouldn’t have been able to fix that issue in a matter of a month or so, but [the seller] certainly could … at least be in a position where we were controlling that narrative.” 

Things usually shake out better for sellers when they’re the ones to disclose potential compliance issues, Bechen said, rather than buyers discovering them in due diligence. 

As such, it’s important for providers on the sell-side to take an introspective look at whether their house is in order. 

Import things to consider include what ownership looks like, as well as any potential accounting issues. Have stock options been awarded to employees? Were those properly documented? What about tax issues? Can you clean any of those up before engaging in a transaction? 

Another key area to examine is workforce, Bechen said. Are employees classified properly? And how important are those specific employees to the company’s overall success? 

“With provider organizations, oftentimes, the people really are the most important asset because they’re [they ones] who provide the services for their patients,” Bechen said. “How do you keep that group of people together and make sure that they’re excited about the [dea] opportunity?” 

Being prepared to answer buyer’s licensure questions quickly and concisely is also important, she added.  

“If there’s a lot of stumbling there, it kind of is a red flag,” she said. “Having those things buttoned up puts together a really nice package and a good presentation and controls the narrative when you’re looking at partnering with another organization.” 

Overall, one of the most vital keys to seller success is having a solid internal compliance program and audit framework, Bechen said. That way, providers are better prepared to navigate any potential issues ahead of a sale. 

“You have an understanding of what that scope is and are able to properly explain and quantify what those situations are,” Bechen said.

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