The Behavioral Health Deal Slump May Be Overblown 

Fears for a sluggish 2023 may have been overblown. “Aggressive” deals are still being made, though they may be smaller than in years past. 

That’s according to industry insiders at Behavioral Health Business’ 2023 INVEST conference. Lenders and issues with access to capital drove lower transaction volumes in 2023, Kevin Taggart, managing partner at Mertz Taggart, said.

“A lot of these strategic buyers borrow a lot of money to buy these companies,” Taggart said.  “Their interest payments have gone up quite a bit over the last couple of years. That’s affecting some deal volume, specifically on the substance abuse side.” 

As an example of Mertz Taggart’s “bullish” approach to behavioral health deals, Taggart shared that the company recently closed on a deal with a “very high multiple, given the market.”

Though 2023 is wrapping up with substantial deals, initial opinions about the year were “worried,” according to Christal Contini, chair of mergers and acquisitions at McDonald Hopkins LLC.

McDonald Hopkins is a law firm with over 270 attorneys, paralegals and professionals with offices in Ohio, Michigan, Florida, Maryland and Illinois.

“But I would say in the lower middle market, we continued to do deals and continue to be busy,” she said. “[2023] was better than I expected.”

Providers who took an organic approach to growth avoided some deal-based anxiety in 2023.

“It’s a good time to be like a de novo-focused provider,” Nick Stavros, CEO of Community Medical Services (CMS), said. “The impact on the M&A market because of interest rates is impacting us less. On the de novo front, we have a lot of the same constraints as we’ve always had, like dealing with community stigma and getting in network with payers.”

Scottsdale, Arizona-based Community Medical Services provides opioid treatment and mental health services with over 40 clinics across nine states

CMS is not slowing down, and the business plans to ramp up growth significantly.

“Our goal is actually to open 30 new de novos in the next 18 months,” Stavros said. “I think the max that a company could open is typically about 10 per year in the [opioid treatment program (OTP)] space just because of all of the different barriers to entry. So that’s pretty aggressive, that’s more aggressive than we’ve ever been.”

The company is capable of this aggressive growth because of newly-acquired private equity sponsors who are “like-minded,” Stavros said.

“Private equity wants to see growth,” he said. “The struggle is finding a private equity group that is going to align with our mission, vision, values and goals.”

That alignment is precisely why sellers should try to speak with multiple buyers, Taggart advised.

“Especially if you’re gonna roll equity, you’re going to have to live with them,” Taggart said. “It’s almost like a marriage.”

To increase the likelihood of a happy marriage, Contini suggested sellers speak with providers who sold to the investor a few years prior and are still with the business.

“It is amazing how honest providers are in terms of talking to their peers, even though they work with private equity,” she said. “A lot of my clients get a lot of good information, not talking to the private equity funds, but by talking to the other sellers.”

Deals in the behavioral health space are still private-equity driven, Contini continued, but many are now add-on deals rather than platform acquisitions. This aligns with forecasts about private equity deals made earlier this year, which suggested that a potential recession may dampen larger deals but allow for inorganic growth via add-on deals. 

Sellers’ strategies may depend on whether the deal is a platform or an add-on.

Although fewer, platform acquisitions do give sellers more opportunities to negotiate terms, including rollover equity, buyback terms and termination agreements. Add-on sellers, on the other hand, don’t have as much negotiating power with the buyer.

Getting a better multiple on a deal has become increasingly possible, Taggart said, and it varies based on factors including payer sources, referral sources, diversification, geographic region and management team.

“On outpatient mental health, we’ve yet to sell one that’s a million dollars in EBITA for less than double digits,” Taggart said. “However, I’m going to caveat that it will happen before the end of the year. So multiples have definitely come down.”