The behavioral health industry has seen multiples in deals for outpatient mental health providers hit remarkable highs in the last few years while the addiction treatment space is on the downside of a merger and acquisition high that crested about five years ago.

Investors piled into the space and sent multiples sky high before cresting in 2018. Since then, multiples in the addiction care space have trended into the mid-single-digits realm, Mertz Taggart Co-Founder and Managing Partner Kevin Taggart said during a breakout session at the 2021 annual conference of the National Association of Addiction Treatment Providers.

While the drop in multiples isn’t as exciting as the “frothy” multiples making waves in the outpatient mental health space, Taggart said that the M&A market in the addiction treatment space is maturing. Mertz Taggart is an M&A consulting firm that specializes in home health, hospice and behavioral health.

Most organizations that are selling an addiction treatment business can expect mid-single digits in terms of transaction multiples. Only much larger operators with a mental health treatment component, in addition to addiction treatment, are able to command multiples in the teens, Taggart said. He pointed to the sale of Newport Academy to Onex Partners and Summit BHC’s sale of Patient Square Capital as examples.

Despite the less glamorous multiples, Taggart sees that the addiction treatment industry still has a very active market within behavioral health M&A prompted by the pandemic.

Greg Kazarian, the founding operating partner of Chicago-based private equity fund Chicago Pacific Founders, shared comments similar to Taggart’s assessment that many organizations that are looking for deals fared well through the pandemic or were only impacted a little.

“[The pandemic] helped them realize that it was a scary period, they wanted some deeper financial backing, they wanted some strength in numbers, and that would assist them in that analysis [to do deals],” Kazarian said.

He also said that organizations are seeking deals, either by seeking investment or by M&A, because they want to stay relevant in some way — whether it be in response to their local market to payer partners.

“Part of what drives us is we believe that if you can say to a payer ‘You can come to us and we can be an integrated, end-to-end solution in multiple markets …’ I think that payers will prefer you. They won’t declare you a strategic partner, but they might treat you like a strategic partner,” Kazarian said.

Kazarian and Taggart identified that owners of addiction treatment center businesses are mostly driven to sell because they are tired of ownership for any number of reasons that include or made worse because of the pandemic.

Behavioral Health M&A Outlook for 2022

The M&A activity that defined 2020 and will likely define 2021 will also carry over to most of 2022, Taggart said, adding that the elevated levels of dealmaking will continue for at least the next nine months.

The nature of most of the behavioral health M&A deals that have and are likely to happen under the influence of the pandemic will likely push against a common fear of employees of companies that are bought and sold — that the buyer will lay off staff.

The panelists said this is often untrue at the front-line level and often only applies at top and middle management where there is likely to be duplication of roles following a combination.

“Certainly, they don’t need two CFOs,” Taggart said.

Most of the deals that Kazarian would undertake in the behavioral health space would be growth deals, where the hope is that the two combined companies will get even bigger. What’s more, the industry is struggling with a workforce crisis.

Jane Barnes, chief operating officer of Austin, Texas-based PaRC Discovery Behavioral Health, offered her perspective as an executive that led an addiction treatment center through a merger.

Barnes was the CEO of PaRC when its previous owner Houston-based Memorial Herman Health System decided to sell it. She said many employees harbored fears about mergers and acquisitions based on common practices in other industries.

“I had one person tell me, ‘My husband works in used car sales and when they bringing in [new owners] everyone loses their job.’ Well, yeah, the most valuable thing at a car dealership are the cars; at our place, the most valuable things are the people,” Barnes said.

Barnes pointed out that the health care industry is fundamentally unlike any other where mergers and acquisitions are associated with mass layoffs because clinicians are what generates value.

Taggart punctuated the diametrically opposing views of employees of companies being sold and the company that is making the acquisition.

“Every employee always thinks that, once they find out there’s a deal, I’m going to lose my job and every buyer is hoping that nobody quits,” Taggart said. “It’s not a manufacturing plant, what you all do. They can’t outsource it to Mexico or China or whatever — the people are super critical. And most buyers want to do whatever they can do to try and keep your employees.”