How Behavioral Health Companies Can Boost Their Value for Mergers and Acquisitions

Behavioral health transactions in the mergers and acquisitions space continue to flourish in 2021. As the country emerges from the pandemic, the need for these services is expected to continue to climb.

Mental health has been a dominant theme in the health care space as COVID-19 has left many in vulnerable and struggling positions related to psychological and mental challenges with depression, addiction, anxiety and general coping in record numbers.

Young as well as established companies continue to innovate in an effort to differentiate themselves from the crowded market to deal with these matters.


It is estimated that, for example, there are 20,000 health-based apps either available or in production, said Dexter Braff, President, The Braff Group, a leading mergers and acquisitions advisory firm specializing exclusively in health care services.

Based upon proprietary data collected and analyzed by The Braff Group, through the end of Q2 2021, there were already 119 aggregate behavioral health transactions (compared to 179 for all of 2020). At this pace, the sector would close out the year up an astonishing 33 percent.

Gaining the upper hand as a seller and as a buyer is critical to make the numbers work during this accelerated business cycle.


“You value a company based on income, growth and risk,” Braff said. “The income aspect is simple: the more money they make, the better. Growth can be measured in how much income can be generated based on customers and potential customers.”

But risk is a much more comprehensive metric and is more critical in the minds of investors, he said.

“Less risky is a company with a diverse, wide-ranging customer base,” Braff said, “and not one that is reliant on any one type, because if that’s the case, the company could have a sharp decline in value should that group dry up.”

Abinav Sankar is Partner at Sopris Capital, a firm that invests in the equity of emerging companies regardless of stage that have proven products, market acceptance, and a management team that can capitalize on the opportunity.

“Investors are looking at the quality of a company’s customer base and how much the company relies on annual contracted clients, or if they rely more on selling to individual providers,” he said. “The more diverse the customer base is the better in the eyes of investors.

Management Team on Solid Ground

A less risky company also has a diverse and talented management group, not one that is controlled so much by one person.

“Should that person leave, then what will happen to the company’s performance?” Braff said. “Revenues could get hit significantly.”

Sankar said companies that are run more proficiently will have less expenses – another good sign.

Braff said a successful company has a strong sales and marketing team. “Keeping that team in place, the revenue, you would expect, would continue after the company is sold,” he said.

Data management is another key component when evaluating companies, Sankar said. “Is the company able to monetize its data? That is something that is becoming more and more valuable today,” Sankar said.

Always look into a company’s legal history, Braff said. “If there are cases pending, or there has been many settlements, that’s a red flag,” Braff said. “If there are legal cases, it could be something systematic within how the management group operates.”

Braff also said that it is smart for buyers to examine the turnover of the company’s staff.

“If there is a lot of staff turnover, then those sales people could leave when the company is sold, which is risky,” he said. “It’s best to look for firms that fully support their workforce.”

Buyers also should study the company’s clinical staff. “If it is solid and they will stay on board after a transaction, the buyers will be less stressed about future performance,” he said. This is particularly important with autism specialists, Braff added, “because right now, finding and keeping good ones in this field can be challenging.”

Financials Tell the True Tale

A lot can be learned from a company’s financial statement.

There are three forms of statements: a compilation is the most basic and it’s simply a numerical accounting of the business. Better is one that has been reviewed by a third-party. That review can indicate solid financials, or ones that are questionable. Best is a statement that has been audited.

“Companies that have used a third-party firm to do a full-blown review of everything to check the accuracy of the records is optimal,” Braff said.

The accounting methods used is another indicator. If the company simply posts things as a “cash” statement that’s one thing, Braff said. “Better is one done through accrual accounting where it charts services rendered and expenses paid. This method is a more accurate and indicative way of looking at how the company is performing.

When companies are looking to buy, they often bring in a third-party firm to perform a due diligence study of the company they wish to purchase, Braff said.

“Ideally, companies that are looking to sell should do the same to themselves,” he said. “These can be done six to 12 months before the company is considering putting itself out for sale.”

Due diligence reporting will indicate sooner (rather than after buyers look them over more closely) and can point out mistakes, usually unintentional ones, that can be corrected, Braff said.

A due diligence study costs between $50,000 and $60,000, Braff said. “But if you are a company worth $10 million to $12 million, for example, it’s well worth it.

“But too many companies don’t do due diligence studies because in their minds, they are a good, honest company. Unintentional mistakes companies might be making could be not having proper licensing or doing certain paperwork incorrectly. They are not trying to get away with something, they simply were unaware that it was an issue.

“If buyers see this, they might drop their bid by a half-million dollars, or back away from the table altogether. Because once again, they might think that this is a systemic problem in management.”

Which are the Hot Niche Markets

Right now, the most attractive behavioral health companies are ones involved in mental health, Braff said.

“We all realize how much COVID-19 has stretched peoples’ mindsets,” he said. “Those dealing with addiction and disorder treatment are also in great demand. Another is outpatient clinic treatment centers with offer counseling such as psychological treatments.

“Any tech-enabled healthcare service that allows for remote appointments rather than requiring a person to come to a doctor’s office are becoming popular.

“The personal wellness app market is booming right now. There are roughly 20,000 such apps available or in production. Not all will make it, of course, but it’s a very competitive market.”

Sankar pointed to companies such as Tapestry Health, one that relies more on nurse practitioners, who deliver personal, face-to-face care to patients. And if they can improve patient care, then that means fewer revisits to the doctor’s office.

“Having better quality patient care with more touchpoints, whether in person or telehealth, at skilled nursing facilities reduces readmissions to hospitals (i.e. emergency room visits), this reduces overall costs of care while improving care quality.”

One service that is growing and is provided by a company such as Tapestry Health is helping skilled nursing facility patients to stop smoking, Sankar said.

“It might seem odd, but you’d be surprised at how many residents in skilled nursing facilities, who have multiple illnesses and require a lot of care are still smoking – some quite extensively,” he said.

There is also demand for companies that can encourage residents to eat healthier diets and ones who can provide psychiatric help to patients, especially those who have cancer or a chronic condition “and need to have positive reinforcing messages given to them as they battle,” Sankar said.

Pre-pandemic, Braff said companies that deal with the autism spectrum were in great favor, but that decreased some during COVID-19; they are starting to pick up again.

Written By Paul Bergeron

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