The Rise of Earnouts and Seller Notes in Behavioral Health M&A

While behavioral health deals have been relatively slow since the post-pandemic boom, many buyers and sellers are now evaluating different structures for deals that could include earnouts and seller notes.

“There absolutely has been a slowdown in M&A activity really since 2022. And there continues to be a real gap in valuation expectations between buyers and sellers,” Amy O’Keefe, a partner at Nixon Peabody, said during a Behavioral Health Business webinar. “We’re seeing a lot of buyers try to bridge that gap by using things like seller notes and earnouts … These structures impact the value and the dollars sellers put into their pocket at closing.” 

Nixon Peabody is a law firm with more than 600 attorneys. Its offerings include healthcare regulatory law, corporate and finances, and nearly a dozen other specialties.


Seller notes allow the purchaser to pay a portion of the deal in future payments. However, according to O’Keefe, there are some nuances and risks to seller notes that come up in deals. For example, if a buyer will pay the seller’s note five years after the deal closes, then it’s worth investigating if there is interest on the note. If there isn’t, then the note has depreciated over time.

Other questions that can arise are about the buyer’s financial health and whether the buyer is at risk of going bankrupt by the time that note is scheduled to be paid off.

Earnouts are another hot topic in dealmaking. In earnouts, the buyer doesn’t get the full purchase price at the time of the closing. Instead, a position is deferred until certain milestones are met.


“To be honest with you as a seller…cash at closing is always better than a note, and a note is generally better than an earnout,” Ted Jordan, managing director at The Braff Group, said. “But that doesn’t always fit the circumstances. And there’s nothing inherently wrong with a note or an earnout. Sometimes, there’s a good reason to employ those in a deal, but … future events don’t always turn out as planned. So these components can change the value of whatever the seller thought they had negotiated.”

The Braff Group is an M&A advisory firm specializing in health care dealmaking.

In addition to some of the business risks that come with some of these alternative deal models, there are also health care regulatory components.

“There’s definitely healthcare regulatory risks, especially in behavioral healthcare; we’re dealing with government reimbursement, Medicaid, and Medicare,” Jéna Grady, partner at Nixon Peabody, said. “There’s a lot of scrutiny in this space for payment for referrals, and the federal government has given very little guidance on earnouts, but they just they don’t pay for referrals and in their ideal situation, the seller could have a potential earnout if the seller was no longer post-closing involved in platform and we know for platform buyers that usually [is] not ideal.”

If behavioral health operators are going to close a deal using earnouts or seller notes, then it’s important to make the deal as simple as possible, Steve Garbon, managing director at The Braff Group, said. Otherwise, there can be complications.

“Sometimes you have misaligned incentives. When you think about EBITA, that’s what a buyer cares about,” Garbon said. “They care about the future cash flow of the business, the profitability, et… But oftentimes, [buyers] are actually thinking about the business when they first acquired it, almost like a J-curve where they expect profitability to go down a little bit after they initially buy it.”

This is because when a buyer comes in and purchases a behavioral health provider, especially a founder-led business, they may need to add some infrastructure and technology. Buyers may also heavily invest in expansion efforts.

“That is likely to have an impact on your EBITA. And it’s good for the long-term prospects of the business but not so good for the immediate return on the business,” Garbon said. “When you have a year or two year earnout that could be impactful to you not hitting your earnout, even though it’s all really going to make the business more profitable.”

The best course of action, Garbon said, is to have black-and-white expectations and guidelines.

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