Art of the Behavioral Health Deal: Critical Considerations for Operators Looking to Sell

Behavioral health operators looking to cash in on their businesses must understand both sides of the M&A equation.

That partly means figuring out how much their company will be worth moving forward and what goes into the valuation-setting process. It also means understanding the micro- and macro-level forces shaping the industry in the present.

Generally, there has been a dip in behavioral health deal-making activity in 2023. Industry insiders forecast a lot of action in years to come, however, as the space is ripe for continued consolidation.


“I like to describe it as a little bit like maple syrup,” Steve Garbon, managing director of behavioral health at The Braff Group, said during a Behavioral Health Business webinar. “There’s a lot of hard work behind the scenes to get to that little bitty bottle you buy on the shelf and put on your pancakes or waffles. And I think at the end of the day, multiples are much the same.”

There’s no one-size-fits-all formula when it comes to assessing a multiple for a deal. Many factors, including a company’s cash flow, risk, growth, as well as the macroeconomic climate, go into coming up with a multiple.

“It’s part science, part art, and it might be part emotion,” Garbon said.


While EBITDA, risk and growth are often the pillars of determining a company’s value, buyers can get caught up in the competitive process.

And what a company is worth might be different for every buyer. For example, if a seller has specific assets that fit very well into the buyer’s future plans, it could be worth more to that company than to other investors.

“They can leverage those synergies,” Dave Berman, principal of health care mergers and acquisitions at SimiTree Healthcare Consulting, said on the webinar. “They can pay a little more because they ratchet down their multiples by applying those synergies, so sometimes you have to be careful. … The devil’s in the details of it all.”

How sellers can get the most out of a deal

While many things are out of a seller’s control, de-risking a business, showing growth and establishing financial credibility are critical to getting the highest multiple.

“The less risky a business, the higher the valuation,” Berman said. “So de-risk your business.”

One way to do this is by spreading out responsibilities across an organization.

Suppose the CEO is wearing too many hats and is responsible for sales, billing and payroll, for example. In that case, it can be a risky investment for a company because if that individual leaves, the business could fall apart.

“Don’t be the person that does everything in the business,” Berman said. “Make sure your referral pattern is spread out, and you’re not just tied to one referral source. … Keep your turnover rate low, treat your employees well, and make it a good place to work.”

Demonstrating steady growth is also a key factor in helping companies grow their multiple..

“I think that growth needs to be meaningful, just not for the sake of growth,” Berman said. “Sometimes you can grow certain segments of your business that aren’t as profitable. And that may not be good for valuation.”

Companies need to have some rigor behind why they are looking to open a new location and demonstrate a marketing strategy and substantial growth plan to develop a new area. A proven track record of successful expansion is key.

If a company can draw from its previous experience in growing its business, it will give a buyer more confidence that growth will happen, Berman said.

It’s important to note that the expectations differ depending on the company size and deal.

Smaller owner-operator companies should prioritize “getting their ducks in a row” and showing the credibility of their financial statements and business process, Will Hamilton, CEO of Scope Research, said during the webinar.

However, buyers will expect more from larger platform companies that are getting higher multiples.

“If you’re a much bigger business, and you’re potentially getting that platform-type multiple,” Hamilton said, “you want to be able to demonstrate that you’ve got the best-in-class operations and resources, and that you’ve been able to grow into new markets or you’ve been able to do tuck-in acquisitions … successfully.”

Buyers are looking for something scalable and replicable, Berman said.

Large platform companies could benefit from showing substantial growth to potential buyers.

“Showing a proven ability to be successful in another state or two can be very valuable when you think about behavioral health [and the] different payer dynamics, especially Medicaid within the different states,” Berman said.

But he wouldn’t recommend that for every company.

“I wouldn’t tell a company with $3 million of revenue to open up a location in a new state, and unless it really made sense, you’re probably better off getting better market penetration into your current state,” Berman said. “But at some point, being able to expand outside your state is very, very valuable.”

Beyond de-risking a company and showing meaningful growth, sellers can ensure they are getting the best multiple possible by soliciting bids instead of accepting the first offer.

“At some point, being able to see that value is by running a competitive process and finding out who finds it a value,” Garbon said. “If you run that competitive process, you know that the buyers are putting their best foot forward, versus a proprietary deal where they come and approach you and have all the leverage – and you don’t know what anybody else would offer.”

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