Volume 8, Issue 15, October 5, 2021

I recently joined VERTESS as a managing director. I'll be providing merger and acquisition (M+A) and consulting services primarily to the behavioral health and substance use disorder (SUD) treatment markets. Like many of my new colleagues, I previously owned and operated a company in the space I will be working in for VERTESS. But that's not all: I also have firsthand, personal experience with substance misuse.

In this column, I'll share a little about this journey with you, how it motivated me to open my company, and several of the key lessons I learned from the sales process.

Personal Background

After years of failed attempts to stop drinking — and my own bias toward Alcoholics Anonymous, which kept me out of the rooms during those years — my family held an intervention for me in 2009. This resulted in a plane ride to Denver and a visit to a residential treatment program. I knew nothing of what the experience would be like but quickly realized that I was going to be in a one-year, behavioral modification program.

During that year, I never met with a therapist or generated the recovery capital that would be necessary to support me in the difficult years ahead following treatment. After completing the program, I found out that my family could not find a clinical treatment facility that would cost them less than $30,000 for a single month of care. They did the best they could without an understanding of the SUD treatment industry, insurance requirements, and admissions criteria. They sent me to a low-cost behavioral modification program because they could not afford a clinical program but needed to help me get into a safe place.

The Accessibility Challenge

After my experience, I became somewhat obsessed with accessible treatment and began consulting with residential programs a few years later. As a proponent of the parity initiatives discussed on Capitol Hill, I was disappointed when the passage of the Affordable Care Act ignited a series of lawsuits against providers who fraudulently manipulated insurance reimbursements to line their own pockets.

Furthering my disappointment in the industry was the lack of appropriations to states’ Medicaid budgets for inpatient and residential reimbursements. In Colorado, where I was living, Medicaid appropriations dried up for inpatient and residential care after the closure of the largest facility in Colorado, which mismanaged finances and operations to the point of insolvency.

Accessible care has advanced substantially over the past several years but still faces significant headwinds. In 2019, legislatures said that there should be enough beds in the country to support the demand for clinical treatment. However, there were not sufficient affordable and “attractive” beds. Those beds offered at an accessible price point were often behavioral modification or homeless-oriented programs, which all but those in dire need will not likely access. Without affordable and attractive options, people are less likely to get the support they need and more likely to continue using their substance(s) of choice.

Co-Founding Spero Recovery

Along with a treatment veteran and clinician, I started Spero Recovery with the intention of providing residential drug and alcohol care at a fraction of the national average cost. I wanted to create the type of environment I would have wanted to find back in 2009 and at a price point I could have afforded. My co-founders drew up programming plans and systems and began marketing the new program to other providers. Meanwhile, I secured real estate, funding, developed the IT systems, and managed financial operations. Before our intended opening, we had so many people calling us for admissions that we decided to move our opening date up by two months.

One difficultly of providing SUD treatment is the fixed costs of staffing. You must invest ahead of the curve, knowing you are spending significant capital that will not be returned until you can maintain a decent census. About three months after opening, I began analyzing burn rates almost nightly in fear that we were not capitalized sufficiently to last through the period of cash flow losses. But we survived our first year of operations, improved the program, and positioned ourselves for growth.

Around the time we were finding traction, COVID-19 precautions resulted in shelter-in-place orders. Not knowing what would result, we thought we would lose our program before we even had the chance to scale it. We were wrong. With job losses and substance misuse rates increasing from the pandemic, more people than ever were seeking treatment and required financially accessible care if they did not have COBRA insurance coverage. In fact, we remained at 100% occupancy with a paid waitlist since the onset of the pandemic in March 2020. Leadership can take a toll on someone who isn’t prepared to wear a target from disgruntled employees and skeptical onlookers, deal with sleepless nights, and work most weekends. One co-founder required a leave of absence to recover from the stress of scaling a business from $0 to more than $2.5 million in annual revenue in only two years. The other co-founder was only involved in operations part-time, leaving me to lead the entire organization without their support. I decided to sell Spero Recovery to an organization that had sufficient senior leadership to continue scaling it into a national program, but I made a mistake along the way: I first sold it to a tangential organization with unaligned cultures and values. As the interim CFO of the buying company, I decided to divest Spero Recovery to an independent sponsor who was well-known in the industry for practicing the principles of recovery in all his affairs. He was the right fit to scale Spero Recovery to a national program.

Lessons Learned From the Sale

If I had to do it all over, I would have built the organization much differently and transacted it differently as well. I learned the following five invaluable lessons in the sale process that may be relevant to other sellers.

Lesson 1: Culture Eats Strategy for Lunch

The idiom is so cliché that it has become white noise but remember that a cliché has a lot of truth in it. Prior to co-founding Spero Recovery, I was an M+A advisor at an investment bank, equipped with an MBA and a head full of financial knowledge. But I lacked wisdom. I had never seen what post-merger integration looked like or checked to see if employees were happy following the acquisition. Turns out, oftentimes accretion does not occur because integrating cultures poses too significant a challenge. Spero Recovery was fortunate to have a CEO who was more interested in the mission than his own personal return, but most companies do not enjoy that kind of relationship with an owner.

Lesson 2: Hire an Advisor

I had several years of M+A experience before Spero Recovery, so I thought I would be able to handle the transaction without hiring an outsourced advisor. The problem wasn’t my lack of knowledge, motivation, or negotiating skills. Rather, it was that Spero Recovery was my baby. At times during the sale process, I was too emotionally connected to the deal to make the most rational decisions. When I processed decisions and conversations with my colleagues, I noticed significant bias from them as well. Furthermore, I was also managing the organization while running the M+A process and was unable to respond as quickly to targets, nor was I able to give sufficient attention to Spero Recovery. It was less about a lack of skill and more about bandwidth and emotions.

Lesson 3: Dig In Your Heels

This was an area where I succeeded. There were certain deal points on which I would not compromise; others were not mandatory. Knowing that most sales processes will result in negotiations, I needed to hold my ground from the start on certain issues.

Lesson 4: Don’t Pick the Fruit Before It’s Ripe

Spero Recovery has tranches of fixed expenses that grow with scale but, like many residential treatment organizations, has significant economies of scale. The company was on the precipice of entering a new tranche of scale and would have experienced accretion from the associated investments within a year. I knew I was picking the fruit before it was fully ripe (selling before it could yield a higher valuation) and left enterprise value on the table by selling when I did. I had reasons to transfer it to the buyer of choice, but I have often questioned the decision to sell the business a year early.

Lesson 5: Celebrate

Part of celebrating the sale was handing a check to each of my employees after it was consummated. Sharing the celebration with my team was the highlight of the entire transaction process.

Here to Help

If you're ready to sell your company or contemplating a sale down the road, I'd welcome the opportunity to speak with you. As I learned from my experience with Spero Recovery, working with an advisor, whether it's VERTESS or another qualified healthcare M+A advisory firm, is one of the best decisions you can make for your business. If you're not doing everything you can to prepare for and execute a sale, you're doing yourself, your company, your staff, and your clients a disserve and almost certainly leaving value on the table.