Is Private Equity Coming for Your Therapy Practice? An Interview with Joe Bavonese

Joe Bavonese: Private equity firms tend to be these rather large companies whose sole purpose is to buy other businesses as an investment and then flip them in a couple years, hopefully making a profit. In the last five years, they’ve figured out that mental health practices can be a very profitable company to purchase in lieu of trying to make a profit. So, we’ve seen this influx of these large national companies that are heavily funded who have either started their own practice — like BetterHelp — or are simply purchasing practices with the goal that “We’re going to buy maybe 5 or 10 practices and then in 3 years we’ll sell them all to a bigger fish and we’ll make 50 percent profit.”  

JB: Well, that’s been the big controversy, Lawrence, because in the last few years, it seems like the larger the private equity firm and the more money they have, the less concerned they seem to be about patient care and/or how the staff is treated. So, that’s one of the ethical issues that I think a lot of practice owners are experiencing. You know, “Do I want to sell my practice to a company where the care of the clients may deteriorate, the staff may be unhappy, and I’ve nurtured this baby from day one as my legacy, and it’s all going to get trashed?” So, that’s definitely one of the big problems. 

JB: What’s attractive about psychotherapy practices is that they are relatively inexpensive to run — you don’t need any fancy, expensive equipment. The demand for mental health, especially since COVID, is through the roof. Then what they typically do is buy a practice that only has psychotherapists and immediately hire several psychiatrists which adds tremendously to the revenue and the profit margin. They’ll do things like this just to eke out as much profit as they can, but it’s really a volume game. In other words, they are really looking for large practices where there are 30, 40, or 50 therapists and then they can really show a higher profit margin on volume. 

JB: Oh, yes. There are. I can talk in terms of revenue over size of the practice, but there are quite a few group practices that have revenue of at least $2 million. I know quite a few that are between $4 and $6 million gross revenue, and then the profit of that ranges from 15 to 25 percent. So, if you have a $5 million practice and you make a 20 percent profit, that’s a $1 million profit a year. That’s not chump change. 

JB: I’ve not heard of a venture capital company wanting to buy a psychotherapy practice. You hear about how they seem to go after tech start-ups and things that really have a chance to scale tremendously. Psychotherapy doesn’t scale tremendously like a Facebook or Amazon.  

JB: Scalability means you can grow exponentially. So, a typical experience would be that of a practice owner who has three therapists who says, “Wow, this is great. I’m making $1,000 profit a month for doing nothing.” Then suddenly, they have 6, 9, 12, 15, and 20 therapists, and they’re making $200,000/year profit, and it just grows rapidly exponentially. Almost everybody I know who has a large group practice never thought they’d get as big as they are. They’re always like, “Well, I thought I might get 5 or 10 therapists and have a nice little cushy cash flow on the side.” But once it takes off it’s almost like it just gathers momentum and more people hear about it. Now, having said that, over the last two years hiring has been very difficult. I think the pace of scalability and growth exponentially has slowed down for many practices. 

JB: I started my group practice in 2000 and there was very little competition. So, it was relatively easy to find competent therapists who didn’t want to deal with their own office, didn’t want to deal with billing if they used insurance, didn’t want to deal with marketing or advertising. They just wanted to show up, do their work, and go home and not worry about anything else. That model worked for a lot of people, so I began coaching group practice owners. 

I designed a course called “Creating Group Practice” in 2009. Back then, almost everybody did very well. The harder thing was getting clients. Getting therapists seemed easier. During COVID, there were two things that kind of juxtaposed. There was COVID, and then there was the influx of private equity. So, we now have companies like BetterHelp that are — you’ve probably got these things in the mail — you know, a $500 signing bonus to do teletherapy.

There are more and more group practices. On Facebook, there’s a page called “The Group Practice Exchange.” It has like 3,000 members. There are more people who have realized that just having a solo practice may not provide enough money to live the lifestyle that they desire. That was certainly my motivation. I thought when I got out of grad school, “Oh, I just need to fill out my practice, my wife’s a therapist and there’s two of us, and we’ll be fine.” Well, life is expensive when you have kids, a retirement, college savings, and all that, and a lot of us realized it’s not enough money.  

JB: The peak valuations group practice owners were getting was around 2020. However, as the interest rates have gone up along with fears of a recession, the valuations that private equity firms have given group practice owners have gone down significantly. But in terms of your question, during COVID I think the virtual therapy businesses like Talkspace and BetterHelp, who had massive backup funding from Wall Street, just poured millions of dollars into hiring and advertising. So, that created a real problem. The other thing I’ve been hearing in the last six months from several group practice owners is that some of these companies are poaching their therapists. So, yes. It’s just created a whole different climate. Now, referrals are plentiful, although that seems to be slowing down a little lately. But finding therapists is much more difficult. 

JB: Less. They’re willing to pay a lot less than they were just two years ago. The other trend I should mention, Lawrence, is that it’s never been easier for a therapist to go out on their own. I’ve heard so many cases over the last two years during COVID of good therapists leaving group practices saying, “I’m going to sit at home and do what we’re doing right now on Zoom or on some other platform, and I’m going to make 100 percent of the money, and I don’t need to pay for an office.”  

JB: Yes, because the people that were able to hire during COVID did very well. I have several colleagues and friends who put a massive amount of money into hiring and retention. They hired recruiters and did all sorts of things. Many of them expanded tremendously during COVID because the referrals were plentiful, and it was just a matter of finding bodies and you could fill them up instantly with referrals. 

JB: Yes. Group practice owners' ability to hire has been a problem. I was just talking to someone yesterday in Oregon. He has a large group practice and said, “The problem is that therapists are leaving to go on their own just to do teletherapy. No office payment. Plenty of referrals if they’re just on Psychology Today. And they’ve been able to keep 100 percent of the money.” 

JB: Yes. They’re still interested. It just seems like they are willing to pay less. There’s a concept when you value a practice called EBITDA, which stands for “earnings before interest, taxes, depreciation, and amortization.” But what it really means, to simplify it for our discussion today, is the profit of your business plus whatever you pay yourself that a buyer wouldn’t have to pay. So, for example, let’s say your practice value is $200,000 a year, but you pay yourself $50,000 a year for salary and you pay yourself $50,000 a year for healthcare and other miscellaneous personal expenses. Well, the new owner isn’t going to have to pay for either of those, so you add that to the $200,000 and now your valuation is suddenly $300,000. Then they give you a multiple of that as the ultimate value they’re willing to pay for the practice. Two years ago, people were getting multiples of 10 or 12 times their EBITDA. So, again, if it was $300,000, that could translate into a $3 million value. Now, in the last few months, I’m hearing 4 to 6 is typical, with occasionally an 8. So, the value you could get two years ago could be double what you get today. 

JB: Yes, absolutely. I’ve been coaching therapists since 2005. One of the biggest struggles a lot of private practice owners have is separating the need for service from the need for paying attention to the bottom line, the numbers, and the money. A lot of therapists tell me they feel guilty if they promote themselves. A lot of therapists are not good at numbers and keeping track of all the metrics. What I would say is the group practice owners who have succeeded at a high level are all entrepreneurial, have all studied business in various ways, and have figured out how to be a business owner as well as a clinician. 

JB: It’s interesting. The first time I went through the process was in 2018. Valuations were still pretty low back then. But the process was that you got a letter saying, “This is what we’re willing to pay for your practice,” and then you have a 60-day period of due diligence where the company that wants to buy your practice wants to look at all your metrics to make sure that what you told them was accurate, which makes sense. So, if you said your revenue was $2 million and it was really $1 million, they would want to know that. So, you had to give them a slew of things like years of tax returns, profit and loss statements, and a lot of just busy work. A lot of spreadsheets, PDFs, and things like that.  

The part I found uncomfortable was that they basically try to prove that you’re lying to them. And you’re pretty much talking to a bean counter. You’re not talking to a therapist. So, their job is to prove that the numbers are valid and accurate. But my experience was they did it in a fairly demeaning way, which was uncomfortable. Like I said, “I gave you all these tax returns, all these bank statements, and you think I’m lying or hiding? What could I be hiding?” So, that was part of the process. Then what happens is that you start out with an offer and then their job is to whittle it down by saying fairly trivial things just to keep lowering the number, which can’t go up from the original number — but it can certainly go down. 

JB: Yes. Ultimately, we ended up with a number that I didn’t think was worth it because one of the things you think about is, well, how much profit do I make in a year? And if I could make up in two or three years what they were going to pay me in one lump sum, well, that seemed kind of stupid. I figured I could make a lot more money in 5 or 10 years than getting out now and just having this one lump sum. 

JB: Yes, exactly. Because if I said to you, “I’m going to give you $3 million,” well, that sounds like a good chunk of money. 

JB: But you’re going to pay taxes, you’re going to pay broker fees, you’re going to pay attorney fees. So, you usually end up with about two-thirds of that, and then is that enough money to live on for the rest of your life? In most cases, not. So, part of it is, do I have enough money to do this, or do I want to stay on and keep working like a lot of people do? I wasn’t interested in that when I was doing it, but a lot of people stay on once they sell and take an annual salary.

I’ve seen $125 to $250,000 a year, and that of course makes it easier to see if the money will last. But then you have the other issue of, “Now, I have a boss when I haven’t had a boss in years and I’m part of a large organization with politics and other things.” But you use the word existential. The meaning question I think is one of the significant ones because if you sell your practice and you leave, and you’ve devoted every waking second to this for the last 10 years, it’s a huge loss of meaning, and I don’t believe one that’s easily replaced. 

JB: What they’re looking for is consistent growth over the last three years — 20 to 30 percent per year. They want to see an expansion in staff. They want to see diversification of services. They’d rather have a company that’s the one-stop-shop that deals with anxiety, depression, couples, and trauma rather than just somebody who has one specialty. They’re also interested to know if medication is prescribed by a nurse practitioner or psychiatrist, which is a huge bonus because it’s a cash cow for them. They’re also interested in geography — they want to enter a territory and start you as the hub of that territory. Or if they already have practices in your location, they may want to add you as one of the spokes around the hub. Those are some of the main factors that they’re looking for. Also, a healthy profit margin. If your profit margin is 8 percent instead of 20, well, you’re not going to get as much money because there’s an inefficiency there that they’re going to uncover. 

JB: This is what happens. Usually, they structure the deal where they’ll say something like, “This is the price I’m willing to pay, but it’s contingent on a certain percentage of therapists staying,” because a certain percentage of therapists will typically leave after a sale. So, for example, what they’ll often do is they’ll say, “I’m going to pay you $1 million for the practice, but only $500,000 today, and then depending on the size of the staff in 6 or 12 months, I may only pay you $200,000 more because you’ve lost 20 percent of your staff.” So, it’s incumbent on the owner to be the cheerleader to encourage all the staff to stay on. Typically, they have better benefits than they had previously, so there are some incentives to stay on. But again, if the quality of the client care and the staff care decreases significantly, a lot of people are going to leave. 

JB: No. The company buying the practice will have a contract everybody must sign. They typically don’t tell them until the ninth inning. It might be two weeks before they close. So, all the therapists will usually meet with the group practice owner as well as somebody representing the buying company, and they’ll present them with a contract. Then they’ll say, “You have two weeks to sign this contract,” and if a significant number don’t sign it then the deal is off. So, that’s the tense part. I have known some deals where they didn’t have a thing like that. The other thing I should mention, Lawrence, is often the companies that are buying prefer that some of the compensation be in the form of stock options instead of cash. So, I might say to you, “Okay, I’m going to pay you $2 million, but $500,000 of that is going to be in stock options.” Then they’ll tout the potential of the stock. However, almost every mental health stock in the last 2 years has gone down 70 or 80 percent, so if you were one of the ones who were banking for a big payday because of your stock options you may have lost quite a bit of what you thought you were getting. 

JB: Yes. In other words, I’m a big company that’s on the stock exchange and I have shares that I will give you. I’m going to give you so many thousands of shares. But you can’t sell them right away. You’ve got to have two or three years before you can sell them. But remember, in the last two years, almost every mental health stock has gone down like the rest of the market. 

JB: Yes. 

JB: The benefits usually include health insurance and retirement. Sometimes it includes stock options for the therapist. That’s another thing. The healthcare and the retirement stuff is generally better than what they had, but in terms of a downside to staying, it's that they’re suddenly part of a huge company instead of a tiny company with 30 or 40 employees, so the policies and procedures are often quite different. They have to learn how to use a new electronic medical record program. They might have to participate in more meetings. They have less say in changing anything, which they might have had at a group practice where they were able to meet with the owner and change something. Now, the therapists who stay on are at the mercy of this rather large national company. 

Sometimes what we’ve seen is that some of these large national companies really don’t have anybody who’s ever run a group practice at the higher levels. So, some of the things that they do don’t work very well. I’ll give you an example. A large national company may, for example, have five practices around Tampa and only one regional call center. A potential client can’t walk into the actual practice and make an appointment. They can’t walk into the office where their therapist works to speak with that therapist or check on their bill. They have to call this regional center that has no idea who they are. The feedback I hear is it’s been awful because people are used to getting answers right away with a friendly face in the office. There might be an office manager they can talk to. Suddenly, there’s this impersonal regional center that answers the calls and a lot of people don’t like that. 

JB: The other one is how the staff is treated. Again, when you run a group practice, you usually have a dedicated admin staff who have grown with you. It feels like your family. They’ve gone through all the tough times with you and the good times, so they’re very loyal. So, the idea of throwing these people to the wolves is part of the ethical issue. I think most group practice owners worry less about the therapists because there’s so many opportunities nowadays for them to land on their feet or go on their own. But I think a lot of the ethical issues I hear are about the unknown part of the sale and how the staff will be treated. For example, an owner may sell their practice in 2022, and the purchasing company says, “Yes, in 2025, we hope to sell out to another company and then all the policies and procedures are going to change again.” So, there’s this unknown. What am I subjecting my staff to? It’s just impossible to know. 

JB: In addition to feeling like things have gotten more impersonal and colder, there may be changes in insurance. There may be changes in therapists’ availability. There may be changes in non-competes. They may feel more locked into a schedule. Those are mostly the things that I think the clients or patients feel. 

JB: The group practice owner must do their own due diligence. In the last couple of years, most group practice owners of a significant size have gotten two to five letters like that in the mail. So, usually, they just want to talk to you on the phone initially and give you the sales pitch about why you should consider this. But I think the red flags would be you really need to be part of a support group of other group practice owners. I run or co-facilitate four different group practice online groups of various sizes and we share resources. Somebody said, “Oh, I’ve got a new one. I just got a letter today. Has anybody heard of this one?” So, it really helps, because when I first did this in 2018, I didn’t know anybody back then who had been approached or tried to sell so I was really shooting in the dark. In retrospect, I’m grateful I didn’t sell because I had no idea what I was doing. 

JB: Again, you just have to do due diligence and see what they’re really offering and ask if it’s really any better than what you’re doing right now. You’re definitely going to lose some freedom. It may make certain aspects of your practice easier. But you really have to research. The companies are so different. Some of them seem very focused on clinical care, and with others it just seems like an afterthought, just as an example. 

JB: As simple as this sounds, Lawrence, the best thing is often to go on Google and just type in the name of the company with the word reviews and it reveals quite a bit. Some of the companies are listed in the Better Business Bureau, though not all of them, and you can get some feedback there. But I’m just finding that the word of mouth through the community probably gives the best information. But I’m surprised by just how much you can get just from a simple Google search. 

JB: Well, like I said, do your due diligence. Get as much information about the company as you can. Especially ask, “Why are you interested in my practice now? What is your goal for the next few years? What is your philosophy about how you treat the staff and the clients?” Because, like I said, some of these equity firms, not all, are just ruthlessly focused on growth and all they care about is bigger, bigger, and bigger, and it comes through clearly when you talk to them. Others will slow it down and talk about their philosophy. But you really want to zero in on how much do you really care about clinical care? How much do you care about the competence of the staff, or is it just a numbers game to you? So, those are some of the things you want to find out. 

JB: Well, they wouldn’t do that because hiring even for them is still difficult these days. Really the only value of the whole enterprise is the staff and the client, so if you fired them, you’d lose the whole revenue. 

JB: Yes. Usually, they have a clinical director, a regional clinical director, or a national one that you’ll talk to who will make everything sound sweet and rosy. But during that 60-day due diligence, that person is pretty absent and you’re mostly just talking to the accountants or the attorneys. 

JB: Yes. That’s what I should mention. There’s no way as a licensed psychotherapist to do this on your own. You have to get a broker or some financial person to help you through it. It’s just too much stuff that you have no idea about. You need somebody who understands the lingo and can help you avoid the obvious traps. 

JB: That’s a good question. I would say the percentage of Black-owned group practices is lower than the percentage of Blacks in the population. Like I said, I’ve talked to probably 80 to 120 group practices in the last 5 years. It’s not an exhaustive search, but it probably gives me a fairly decent survey of who is out there. I haven’t heard of that. I think they’re more focused on the numbers and whether the location fits into their long-term strategy, but I really don’t have any data on that. 

JB: Well, it is idiosyncratic, but there are some categories I think people fall into. One category is that “I’m so burned out and sick of this, I’ve got to get out,” which unfortunately I know a fair number of people like that where they are constantly stressed out by their group practices, constantly stressed out, and physically and emotionally exhausted by the demands of dealing with the staff. For those people, I think if they can afford the deal financially, it is probably best to get out because they’re not happy. They’re really not enjoying the ride. Then the other thing is the category of people that just want to say, “I don’t want to ever have to work again if I can get a good enough deal, and if I like the philosophy of the company buying me, then that’s good and I’m happy to do it.” But again, it depends on your age, the age of your kids, all those financial things, and your lifestyle. So, I’m thinking the most common thing is that the motivation is financial, clearly. A good friend of mine recently said, “I’m looking for a new challenge. I’ve been doing this for 10 years. It works well, I know how to do it, but it’s getting kind of boring. And a lot of the private equity firms are saying, ‘I want to buy your practice and then I want you to spearhead the project of adding eight more locations around the area of your practice.’” 

JB: Yes. But if they want to stay on to keep a salary coming, that’s basically what they’re going to be doing for a while. It’s just, “Okay, what do you think of this one?” More than likely, the parent company will fund it. One of the nice things people have told me is not having to worry about the price of furniture or computers — it’s sort of like a blank check. Whatever you need in terms of a new location, we’ll provide it. 

JB: Yes. There are a lot of people who are interested in it, but they don’t know some of the things we’re talking about today. They don’t know the realities. Or somebody promised them something on the phone that turned out to be false in the long run. So, I do one-on-one coaching. I have other colleagues who do one-on-one coaching for the same reason for those people. 

JB: JB: I just think the existential issue gets minimalized by people. I really don’t think people realize how hard it is to replace meaning in their life because it’s not like most entrepreneurial-minded people who are successful at a group practice do not do well with free time. One of the phenomena I’ve seen which is interesting is that as people get bigger and more successful, they stop seeing clients totally and then they delegate more and more stuff, and suddenly they might only be working 10 or 20 hours a week. You would think on the surface that would be great, but what I hear is, “What do I do with my time?” So, it’s like having gaps in their schedule after working crazy hours for years to build this thing up is often difficult. It sounds funny, but it’s a real issue that I think people minimize when they go into this process. 

JB: Yes. It becomes more therapy than business coaching at that point because everybody’s sense of meaning is different. But I guess it’s no different than retirement coaching other than they’re still working to some degree. But yes, it becomes more like therapy to kind of tease out, “Well, what are the most meaningful things?”

One of the things that I did was to ask myself, “What were some of the things that I stopped doing when I had kids and when I started my group practice that I wished I could have continued?” Then I made a list and that’s what I’m doing now, so it works out nicely. But I still think a lot of people have never thought about it. “Well, it’ll just be an endless vacation, or I’ll just play golf.”   

JB: That’s right. 

JB: Well, good. I’m glad to hear that, thanks.