Why the Behavioral Health Industry Could See More Deals Between For-Profits and Nonprofits

As the M&A market begins to rebound for behavioral health providers, many in the sector are looking beyond their traditional targets and bridging the divide between nonprofits and for-profits. 

Historically, for-profits and nonprofits have had many preconceived notions about each other. Nonprofits have dismissed private companies as solely profit-driven entities lacking a true mission. Meanwhile, private companies saw nonprofits as operationally inefficient and lacking financial savvy.

But I think these prejudices are a bit outdated at this point, and the pair could use one another’s strengths to help build a better operation. Nonprofits bring to the table years of experience and relationships in the community. For-profits have experience running the business side of things and scaling. 

We’re also seeing nonprofits grow in operational maturity and for-profits expand their community relationships.

Additionally, more for-profit providers are working with Medicaid patients — a patient population that nonprofits have traditionally cared for. 

And there have already been glimmers that nonprofit providers are playing into private equity-backed providers’ growth strategy. 

“The nonprofits have substantial capital and are being managed at a higher business acumen … than we’ve seen in the past decade,” Stacy DiStefano, CEO of Consulting for Human Services, recently told me. “So, I think they can compete more effectively now, leveraging combined assets, economies of scale and deep relationships in the community. That’s part of their advantage over the newer, PE-backed investment folks coming in.”

I explore the opportunities and pitfalls that come into dealmaking between nonprofit and for-profit providers as part of this week’s exclusive BHB+ Update.

Have we seen this before?

While nonprofits tend to be mission-driven, like every provider, they need capital to make that mission come to fruition.

For many, public funding and donations just aren’t going to cut it in building out their growth vision. 

“I think a lot of the nonprofits are going to come to a point where they need to figure out how to get additional capital, which is now more expensive,” Vasanta Pundarika, co-head of health care investment banking at Matrix Capital Markets Group, previously told BHB. “Some of the not-for-profits are probably going to look at their missions and how [they can] continue to grow to fulfill this mission. One of the ways they can do that is by going through an M&A transaction and joining a larger, growing company with the capital resources.”

These types of marriages between for-profit and nonprofit operators are beginning to crop up, and it’s likely this is just the start.

In fact, nonprofit IDD provider Mosaic has worked with for-profit groups on both the buyer and seller side. In 2020, the Nebraska-based company divested its Texas assets to a private company called Caregiver.

It has also purchased private company Living Innovations Support Services, a New England-based IDD provider.

There have also been some glimmers of these deals in the addiction space. For example, in 2021, private equity-backed substance use disorder provider Summit BHC acquired the nonprofit addiction treatment center Seabrook.

Although, it’s worth pointing out that not every crossroad merger has been long-lasting. In December, nonprofit addiction provider Hanley Foundation purchased specialized substance use disorder provider Origins from private equity firm TRT Holdings. Following the deal, the merged company operated as a nonprofit. 

It’s important to note that just five months after Hanely purchased Origins, it sold the provider to a private owner: T&R Recovery Group. 

Stumbling blocks

While there have been more of these nonprofit–for–profit mergers in the last few years, one reason we haven’t seen more is that the matchmaking process is hard.

“I think in general one of the critical challenges in the M&A process is this lack of standardization for matchmaking,” DiStefano said. “There’s best practice, standards for due diligence and standards for valuations and some of those more tactical components, but the initial vetting process to me often lacks focus and lacks alignment on mission and culture. To me, successful mergers are not just about the financial compatibility, but about the shared value and shared vision.”

DiStefano noted working with consultants could help ease the matchmaking process by finding a good fit and aligning expectations.

Still, deals between the two entities are still not particularly common overall. For example, from 2018 to early 2023, Matrix Capital Markets Group reported 439 transactions in the behavioral health space.

Of that, 39 transactions included not-for-profit targets, 42 deals included not-for-profit acquirers and 27 not-for-profit mergers with other not-for-profits. Yet only 12 were not-for-profit acquired by for-profit organizations.

Having a game plan going into the transactions could be essential for providers and their teams.

“I think engaging in scenario planning where potential, unintended issues or situations may arise and proactively having a plan for how these will be addressed is helpful to mitigate some of those stumbling blocks,” Kathy Carmody, CEO of The Institute on Public Policy for People with Disabilities, recently told me in an email. “Finally, recognize that there will be growing pains and unforeseen events or changes in the landscape that will impact the organization; cultivating a culture of confidence and adaptability will position the organization to avoid some unnecessary obstacles that could otherwise threaten growth and viability.”

I think staying true to an organization’s mission could be particularly important because it’s a driver in why many clinicians decide to work for nonprofits.

Workforce recruitment and retention continue to be a challenge for providers as supply and demand challenges remain. Despite the business opportunity for nonprofits and for-profits to join forces, I wonder what this will mean for staff retention.

If a private company, in particular, buys a nonprofit, the company must be willing to demonstrate to staff members that their mission is aligned and the culture will stay the same. Otherwise, there could be a mass exodus of clinicians.

On the flip side, private companies could offer incentives that would be out of reach at a traditional nonprofit. For example, some private equity-owned providers offer equity incentives.

These types of structures give clinicians a stake in their workplace and a carrot to stay at least until the provider exits.

Although nonprofits may have a leg up when it comes to community relationships, it would be unwise to dismiss private companies’ knowledge of the business.

“I think the PE-back providers and the private providers were just looking to their own peers, and they’re saying, ‘Oh, well, that’s Medicaid or that’s nonprofits, and they are different,’” DiStefano said. “Now, I think that there’s a shakeout between the well-run and well-positioned organizations to compete in the M&A space. And so I think that both sides are paying attention.”

DiStefano reminded that 503 status is a tax designation not a business. At the end of the day, cross-aisle deals could open up the pool of companies with diverse expertise. As they say, opposites attract.