Predicting Robust Q4, M&A Expert Tells Potential Behavioral Sellers ‘Come on in, the Water’s Fine’

The behavioral health care industry entered 2020 with strong momentum on the mergers and acquisitions front, coming off a year filled with 85 deals in 2019 and 97 the year before that. 

For the most part, experts predicted 2020 would see more of the same, with private equity (PE) firms and strategic buyers showing continued interest in middle market companies operating in hot subsectors such as autism treatment services.  

Then the coronavirus hit. The COVID-19 emergency slowed deal-making to a near halt in most industries, including behavioral health. But now, it appears the worst of that impact is finally behind us, according to Mike Moran, principal at the nationwide M&A advisory firm American HealthCare Capital.


While behavioral health deals were delayed as a result of COVID-19, the vast majority of them remained on track, just at a slower pace. And in Q4 2020, those planned transactions will finally get moving back up to speed, making for an especially active deal landscape in the months to come.

“As of four to six weeks ago, our phones have been ringing more steadily, and our engagements [with] potential sellers have picked up, now that we’re seeing some normalcy and the enigma of COVID is seemingly behind us,” Moran told Behavioral Health Business. “Our Q4 is lined up to be solid and just as robust as any other year.”

In fact, Moran predicts this could be one of the company’s better fourth quarters, considering the number of delayed deals now ready for closure.


“Travel restrictions and the uncertainty of COVID-19 Paycheck Protection Program (PPP) loans and other grants … were unforeseen added layers in due diligence that pushed these deals out,” he said. “But now we’re beyond the delays and uncertainty.”

Setting the stage

In Q1 of 2020, the behavioral health industry saw 25 transactions, according to the M&A firm Mertz Taggart; Then, in Q2, that number dropped to 18.

Burk Lindsey — managing director in the health care investment banking group at Raymond James & Associates — chalked the decline up to COVID-19 uncertainty, not lack of interest in the behavioral health industry.

“Companies immediately went into bunker mentality because every operator had to figure out, ‘Okay, what does COVID mean for our business?’” Lindsey told BHB. “Though the slow down began in April, it really wasn’t until mid- to late-May that we began to understand the potential impact on sectors and companies, so Q2 ended up being kind of a lost quarter in many respects.”

By late June, the deal market had begun to show signs of opening, Lindsey said. And by Q3, deal activity had picked back up, though Mertz Taggart has not yet released its behavioral health M&A report for the quarter to show the extent of the rebound.

Meanwhile, Lindsey was hesitant to speculate how Q4 volumes will compare to previous years. But like Moran, he anticipates the quarter will be “really robust,” especially in certain areas of the market.

“We’re going to see a really active Q4,” Lindsey said. “Although we’re going to have really good volume, it’s going to be subsector specific.”

Some subsectors of interest will include outpatient mental health care and other types of behavioral care that can be delivered via telehealth, he predicted. On the other hand, autism therapy and residential substance use disorder (SUD) treatment might be slightly slower to bounce back due to challenges associated with how those services are delivered, Lindsey said.

Also variable are company valuations — though, overall, they remain high, according to Moran.

“Multiples from our standpoint and our experience have not changed,” Moran said. “They’re just as solid and robust as they were pre-COVID, but it all depends on the business. … If the business is healthy, if it’s profiting and it’s gotten back to normalcy, there’s no reason to expect a discount from a multiple standpoint.”

The bottom line is that M&A conditions in Q4 look ripe, especially for potential behavioral sellers.

“My advice to a business owner considering a transaction — if their business hasn’t been COVID-19 impacted or in some rare cases has benefitted from this period — would be to come on in,” Lindsey said. “The water’s fine. There’s robust and more concentrated interest now. In many ways, buyers are more focused now because there are fewer opportunities in the market.”

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