Red Flags, Green Flags: How Behavioral Health Buyers are Evaluating Operators

This is an exclusive BHB+ article

Working with investors is a lot like dating. It’s about building meaningful relationships and understanding one another’s priorities. Along the way, certain signs emerge: green flags that signal alignment and red flags that suggest potential challenges.

How behavioral health organizations assess and act on those red flags and green flags will determine if a deal is headed for a happy, lifelong marriage or something much less pleasant.

“The red flags that we see most commonly are going to be in charting and billing,” Ryan Kaczka, managing director at Strategique Partners and partner at Stone Street Partners, said during a panel chat at INVEST 2025. “If you’re doing a stock purchase — no matter how much warranty insurance you have, how much you left in escrow as a holdback, no matter what it is — you’re still exposed, and so making sure that is buttoned up is priority No. 1.”

Kaczka added that skipping over or overlooking concerns with how a company handles its revenue cycle management and compliance with payer partners are fatal mistakes in a due diligence process.

“I can’t stress enough: spend as much time and money as you need in due diligence,” Kaczka said. “Make sure everything is double- or triple-checked because you only get one time to make a decision, and after that … you’re the legal holder for all the good and all the bad.”

Stone Street Partners is a private investment fund that operates in North America and Europe. Strategique Partners is an investment bank focused on transactional services.

Jessie Laurash, principal of the lower-middle-market private equity fund Health Enterprise Partners, echoed a similar sentiment regarding red flags in deals.

“When we’re looking at a behavioral health investment opportunity, we probably over-index on legal diligence and try to get in front of any hairy situation that might be happening in the company,” Laurash said.

Ensuring legal compliance across the board is vital; being squared away could be a matter of survival for a company. Even if the fundamentals of a company are solid, Laurash said, one “bad actor” within a company can spell its untimely end.

“What keeps me up at night as a healthcare investor is headline risk,” Laurash added.

On the strategic front, behavioral health providers with greater payer revenue concentration may be at a greater risk than those with more diverse revenue streams, Justin Outslay, founder of the search fund Cinnamon Hill Partners, said during the panel.

Payer concentration may not appear to be problematic at first glance. The payer and provider may have an especially productive relationship, or the rates are better than other payers in the market.

“If that [concentration] is because the other payers in the market aren’t offering rates that are profitable at all, acquiring that as part of an organic growth play with the thought of diversifying the payer rates over time, in that particular market, can’t be done well or easily,” Outslay said. “I’d say that’s a red flag within a red flag.”

But what about the green flags?

Key indicators of a healthy business include marketing spending and clinician retention, according to the panel.

Investors will be impressed by businesses with solid bookings, waitlists and minimal marketing efforts. Psychiatric providers in the outpatient space that have spent no money on marketing have similar net profit margins to residential care providers, “sometimes better” because of the absence of that expense, Kaczka said.

“In spaces with a little less consolidation provide easy expansion opportunities for buyers,” Kaczka said. “If you can take a company … and then actually spend $1 or more on marketing a company that already has a waitlist, congratulations.”

Clinician turnover and retention provide investors with significant insights into the overall care and quality of an organization. Provider satisfaction is a key indicator of the much-vaunted culture question.

“Happy providers are good providers,” Laurash said. “When we see that there’s very low provider turnover, or very low employee turnover overall, that’s typically a good signal that that is some place that people like working at, coming to work at, and ultimately, they’re going to deliver good value.”

Provider retention and productivity rates can serve as a stand-in for clinical quality if a provider isn’t tracking outcomes data and can help illustrate outcomes data, Outslay said.

“Something I would maybe dig into is what each clinician’s no-show rate is. That could be an indication of if [patients] actually like spending time with them,” Outslay said. “It could be difficult to look into clinical quality until you get to know some of the team members.”

There are also key questions to ask about alignment with the reason a practice owner wants to sell. Outslay said that deal processes that don’t have alignment on this issue are likely to crumble.

For Outslay and Cinnamon Hill Partners, part of the pitch to practice owners is to continue the legacy of the founder at an expanded scale. Understanding why the owner wants to sell is critical to the future of the practice and the investment.

“That’s a big decision. This is their baby, and so I try to spend as much time with the seller talking about that,” Outslay said.