Buying and Selling Sober Homes and Other Recovery Facilities

Are you interested in buying or selling a sober home or other recovery facility? If you are, you are not alone. A good deal of consolidation is occurring in the substance abuse disorder industry. However, it is important to keep in mind that the sale and purchase of a going concern involved in such a highly regulated business has its own challenges.

If you are considering buying or selling a sober home or other recovery facility, you must plan ahead. In going through with this transaction, you will be confronting issues unique to a health care organization. Here is a partial list of some of the matters that you should start thinking about as you consider this transaction:

  1. Be careful with patient information because that information is protected by several laws. You may have heard of the Health Insurance Portability and Accountability Act (commonly known as HIPAA). HIPAA protects against the unauthorized disclosure of confidential patient information. However, you may not be aware that federal and state laws. However, federal law and laws in several states, including Florida, provide additional protections against the disclosure of information related to patients in substance abuse programs. These laws go further than HIPAA and provide even stricter rules about confidentiality. If you are a seller of a sober home or other recovery facility, you must protect the confidentiality of the patients’ information. If you are a buyer of a sober home or other recovery facility, you must find a way to conduct due diligence while still complying with the confidentiality requirements.
  2. The sober home or recovery facility you are thinking of selling or buying may be licensed by certain governmental agencies. It is important to keep in mind that licenses do not just transfer automatically with a sale. The license may have a waiting period for transfers and may require completion of the transfer before the sale is finalized. The seller of a facility needs to be concerned about this transfer just as much as the buyer does. For example, some licenses consider the seller responsible until the buyer is licensed. In addition, some licenses require that the seller maintain records for certain periods of time.
  3. Consider the non-compete clauses that a seller will undoubtedly be asked to sign as part of the deal. It is important to keep these clauses in mind when you evaluate the terms of the sale. For example, a seller will undoubtedly have to sign a clause saying that he will not solicit his former employees. When drafting this clause, you should look carefully at its terms—what geographic area does it cover and how long does it last? This clause can have a major impact, so you should pay attention to it.
  4. Think carefully about what assets the seller has that will become part of the transaction. It is often complicated to place an exact value on these assets. You cannot just look at the number of patients currently in the facility. They are certainly not “for sale!” You also have to consider the average length of stay, how the facility replenishes its patient population, and how it will continue to replenish its population after the sale. Sometimes there is a “system” in place that adds value to the sale. It is important for both sellers and buyers to take the specifics of the situation into consideration and evaluate the legality.
  5. The price of the facility will include an amount to pay for other “hard assets” the facility owns. For example, a facility may own real estate, have money in bank accounts, or have expensive equipment. In considering a transaction, you should think about the values of these assets.
  6. Consider the employees of the facility. Will the clinicians, house masters, technicians and counselors stay after the sale? Are there pension plans or other employment related matters that must be reviewed?
  7. One additional complication could be the existence of long term agreements such as lab contracts, real estate leases or other obligations. Think about whether the facility has such commitments. You also need to consider whether the agreements can be assigned in the sale—if not, the sale might be considered a breach.
  8. The sale will have tax ramifications. It might result in a capital gain or loss. An accountant should be involved.
  9. The sales agreement might be structured to include payments over a period of time. A seller should evaluate the buyer’s financial condition and ability to pay the agreed amounts. One question a seller should think about is whether the buyer will be relying solely on income from the purchased facility to pay the debt.
  10. One hot button topic has been the attitude of insurance companies towards recovery facilities. The parties to the transaction need to evaluate the accounts receivables and the possibility of their collection.

As the above list begins to illustrate, buying or selling a sober home or other recovery facility presents more issues than buying or selling an average small business. This is not a restaurant or a hair salon you are dealing with here.
The seller must place a value on the sober home or other recovery facility and all of its assets (including the value of goodwill) and must then undertake careful planning to ensure a smooth sale. During this process, the seller must balance the sale efforts with ongoing patient responsibilities, maintenance of licenses and qualifications, and other daily tasks involved with operating the sober home. The buyer must use the information available to evaluate whether the sale is in his best interests. Both parties face a lot of responsibility.
If you are considering buying or selling a sober home or other recovery facility, please contact a legal professional such as the experienced attorneys at Weiner & Thompson. This article is not intended to provide legal advice.

About Michael Weiner