M&A experts predict 2021 will bring a wave of behavioral health transactions as investors and strategic buyers, finding fewer attractive targets in other industries, turn their attention to addiction treatment and mental health services. But heightened buyer interest doesn’t mean every substance use disorder provider will find themselves courted with competitive offers. In fact, certain characteristics can quickly transform a seemingly attractive target into a deal non-starter.
According to private equity investors and healthcare attorneys who structure these transactions, the difference between providers that attract premium valuations and those that struggle to find buyers often comes down to a few critical factors: clinical care quality, operational sophistication, and compliance infrastructure. Get these wrong, and even providers with strong revenue growth may find themselves on the sidelines watching competitors get acquired.
Understanding what turns buyers off—and why—can help SUD providers position themselves for successful transactions or, at minimum, avoid the embarrassment and wasted resources of deals that collapse during due diligence.
Clinical Care Quality Trumps Everything
Todd Rudsenske, partner at Webster Equity Partners, a private equity firm with behavioral health investments including BayMark Health Services and Discovery Behavioral Health, was unequivocal about what matters most when evaluating acquisition targets. Speaking at a recent American Health Law Association webinar, Rudsenske identified clinical care model as the starting point for every assessment.
“What’s the clinical model?” Rudsenske asked. “And is it advancing care in a community that results in outcomes that are guided by, again, the right clinical care?”
This emphasis on clinical quality reflects both values and pragmatism. Buyers with long-term horizons recognize that providers delivering substandard care eventually face regulatory scrutiny, reputational damage, and unsustainable business models. Clinical excellence, by contrast, supports patient outcomes, positive word-of-mouth, favorable payer relationships, and regulatory compliance—all ingredients for durable value creation.
But clinical quality isn’t just about avoiding problems. Providers demonstrating measurably superior outcomes through evidence-based practices can command premium valuations. As outcome-based payment models gain traction in behavioral health, clinical effectiveness becomes a competitive advantage that translates to financial performance.
For SUD providers specifically, clinical model assessment includes evaluating medication-assisted treatment protocols, therapy modalities, discharge planning processes, and aftercare support systems. Buyers want to see that treatment approaches align with current evidence and clinical guidelines rather than outdated or idiosyncratic practices.
The Marketing Spend Red Flag
Rudsenske shared a cautionary example that illustrates how financial statements can reveal misplaced priorities. Before joining Webster Equity Partners, he was introduced to a treatment provider that considered itself an attractive acquisition target. The company had strong revenue growth and appeared operationally sound on the surface.
However, deeper examination of financial statements revealed a troubling pattern. The provider spent approximately $9,000 per patient on advertising and customer acquisition efforts while investing only $6,000 to $7,000 on actual clinical care delivery.
“That didn’t seem right to us that you would spend more money working to gain a customer than you would actually spend on the clinical care for them,” Rudsenske explained. “There’s things like that, that you look at and say, ‘Does this make sense?'”
This imbalance signals several problems to potential buyers. First, it suggests the provider may be prioritizing growth over quality, a model that often proves unsustainable as reputation deteriorates and outcomes suffer. Second, heavy reliance on paid customer acquisition indicates the provider isn’t generating sufficient organic referrals from satisfied patients, alumni, and referring professionals—a warning sign about quality and reputation.
Third, such spending patterns raise questions about the sustainability of patient volume once acquisition funding ends. If a private equity buyer reduces marketing budgets post-acquisition to improve margins, will census collapse? Providers dependent on aggressive marketing to maintain volume represent riskier investments than those with strong reputations driving organic demand.
The specific dollar amounts in Rudsenske’s example matter less than the ratio. Spending somewhat more on marketing than clinical care might be defensible during rapid growth phases, but the magnitude of disparity he described—50% more on marketing than care—crosses into territory that makes buyers question fundamental priorities.
Beyond Clinical Care: What Else Matters
While clinical model leads Rudsenske’s evaluation criteria, he also examines management teams, outcomes data, patient engagement metrics, and return rates. Each provides insights into operational quality and sustainability.
Management team assessment focuses on whether leaders have relevant experience, demonstrate strategic thinking, and can execute operational plans. Buyers often view management as either major assets worth retaining or liabilities requiring replacement. Strong management teams can remain post-acquisition to drive integration and growth, while weak teams necessitate expensive recruiting and transition periods.
Outcomes data reveals whether the provider actually helps patients recover. Buyers increasingly expect sellers to demonstrate measurable clinical effectiveness through metrics like completion rates, abstinence rates at discharge and follow-up, employment outcomes, and patient satisfaction scores. Providers unable to produce credible outcomes data face skepticism about quality claims.
Patient engagement metrics indicate whether individuals remain actively involved in treatment or drift away. High dropout rates suggest clinical ineffectiveness, poor patient experience, or inadequate support systems—all concerning to buyers.
Return rates show how many patients require readmission after discharge. While some returns are clinically appropriate, consistently high readmission rates may indicate inadequate treatment during initial episodes or insufficient discharge planning and aftercare support.
When Compliance Issues Kill Deals
Kate Bechen, partner at Husch Blackwell LLP and another speaker on the AHLA webinar, provided perspective from the legal side of transactions. Her recent experience illustrated how compliance problems can abruptly end acquisition discussions even when other fundamentals look strong.
“I just had a deal that came to a quick end because a pretty significant compliance issue was discovered by the potential buyer,” Bechen recounted. “We wouldn’t have been able to fix that issue in a matter of a month or so, but [the seller] certainly could at least be in a position where we were controlling that narrative.”
The specifics of the compliance issue weren’t disclosed, but Bechen’s comments reveal important dynamics. First, buyers walk away from deals when compliance problems are significant enough to create material liability exposure or operational disruption. The risk simply isn’t worth pursuing the transaction, especially when other acquisition targets don’t carry the same baggage.
Second, timing matters enormously. Compliance issues discovered late in due diligence waste months of work and professional fees on transactions that ultimately fail. Even worse is discovering problems after closing, creating liability for buyers and potentially triggering purchase price adjustments or legal disputes.
Third, how problems are disclosed influences outcomes. Bechen emphasized that situations “usually shake out better for sellers when they’re the ones to disclose potential compliance issues rather than buyers discovering them in due diligence.”
Proactive disclosure allows sellers to control the narrative, explain context and remediation steps, and demonstrate good faith. Buyers discovering problems independently assume the worst—that sellers tried hiding issues and additional problems may lurk undiscovered. The trust breakdown often proves insurmountable even if the specific compliance issue might have been manageable with upfront disclosure.
Getting Your House in Order
Bechen urged providers considering transactions to examine whether their “house is in order” across multiple operational areas before engaging with potential buyers. This introspective assessment should cover ownership structures, accounting practices, employee matters, and licensure compliance.
Ownership structure clarity matters because ambiguous or disputed ownership derails transactions. Questions about who actually owns the company, what rights various stakeholders hold, and whether all ownership interests are properly documented must be answered definitively. Discovering mid-transaction that a former partner claims ownership interest or that ownership transfers weren’t properly documented creates deal-killing uncertainty.
Accounting issues encompass both historical practices and current compliance. Have revenues been recognized appropriately? Are expenses properly categorized? Do financial statements accurately reflect business performance? Buyers scrutinize accounting practices intensely, and material discrepancies or aggressive accounting approaches raise fraud concerns.
Stock options and employee equity require particular attention. Have options been granted to employees as compensation or retention tools? Were those grants properly documented with appropriate agreements? Are there tax implications that haven’t been addressed? Undocumented equity arrangements create uncertainty about what obligations the buyer inherits.
Tax compliance represents another critical area. Outstanding tax liabilities, aggressive tax positions that might not survive audit, or failure to remit payroll taxes all constitute serious problems. Buyers want clean tax situations without exposure to penalties, interest, or back taxes.
The Workforce Question
Bechen identified workforce issues as particularly important for provider organizations where “the people really are the most important asset because they’re the ones who provide the services for their patients.”
Two workforce dimensions require attention: proper classification and retention strategy. Employee classification determines whether workers are properly categorized as employees versus independent contractors, exempt versus non-exempt for overtime purposes, and full-time versus part-time for benefits eligibility. Misclassification creates liability for back wages, benefits, taxes, and penalties—exposure buyers understandably want to avoid.
Beyond classification compliance, buyers assess how critical specific employees are to organizational success and whether those key people will remain post-acquisition. In provider organizations, clinical staff directly generate revenue and deliver value. If key therapists, counselors, or physicians leave following acquisition, the business value evaporates.
This creates particular challenges in addiction treatment where individual therapists often develop strong relationships with patients and referring professionals. Buyers need confidence that clinical staff will embrace new ownership rather than departing to competitors or starting their own practices.
Retention strategies might include employment agreements, incentive compensation tied to transition milestones, cultural alignment between buyer and seller, or clear communication about how the transaction benefits staff through improved resources, career development, or compensation.
Licensure and Regulatory Compliance
Bechen emphasized the importance of being prepared to answer licensure questions quickly and concisely during buyer discussions. “If there’s a lot of stumbling there, it kind of is a red flag,” she noted.
SUD treatment involves complex licensure requirements at facility, program, and individual practitioner levels. State regulations specify what licenses are needed for different service types, what clinical staffing ratios must be maintained, and what documentation proves compliance. Providers operating in multiple states face multiplicative complexity.
Buyers expect sellers to articulate clearly what licenses the organization holds, what those licenses authorize, when renewals occur, whether any licensure issues exist, and how the organization monitors ongoing compliance. Hesitation or confusion when answering these fundamental questions signals operational deficiencies that make buyers nervous.
Beyond just holding appropriate licenses, providers should demonstrate systematic approaches to maintaining compliance through tracking license expiration dates, ensuring individual practitioners maintain required credentials and continuing education, documenting supervision relationships where required, and monitoring that services delivered align with licensure authorizations.
The Compliance Program and Audit Framework
Bechen identified robust internal compliance programs and audit frameworks as perhaps the most vital preparation for successful transactions. These systems provide early warning of problems while they’re still manageable rather than discovering issues when buyers perform due diligence.
Effective compliance programs include written policies and procedures, regular training for staff, monitoring and auditing mechanisms, clear reporting channels for concerns, and documented investigation and remediation processes when problems arise. This infrastructure demonstrates organizational commitment to compliance rather than reactive scrambling when problems surface.
Audit frameworks involve systematic review of high-risk areas. For SUD providers, this might include billing and coding accuracy audits, medical record documentation reviews, controlled substance management audits, licensure compliance checks, and employment practices evaluations. Regular internal audits identify problems early when they’re easier and less expensive to fix.
When compliance issues are discovered through internal programs before due diligence, sellers can demonstrate to buyers that the organization takes compliance seriously, problems were promptly addressed, and systems exist to prevent recurrence. This dramatically changes the narrative from “compliance failure” to “functioning compliance program doing its job.”
Bechen explained the value: “You have an understanding of what that scope is and are able to properly explain and quantify what those situations are.”
Quantifying compliance exposure allows buyers to assess risk accurately rather than assuming worst-case scenarios. If an internal audit discovered billing errors affecting 2% of claims worth $50,000, that’s manageable exposure. If buyers discover billing problems during due diligence without knowing the scope, they may assume far worse and walk away or demand massive purchase price reductions.
Preparing for the 2021 M&A Wave
If M&A experts’ predictions about robust 2021 deal activity in behavioral health prove accurate, SUD providers have limited time to position themselves as attractive targets rather than cautionary tales. The work required to strengthen clinical models, build compliance infrastructure, and organize operational and financial house can’t happen overnight.
Providers serious about eventual transactions should begin assessments now, identifying gaps between current state and buyer expectations. Clinical model evaluations might involve comparing treatment protocols against evidence-based practices, implementing outcomes measurement systems, or strengthening discharge planning processes.
Compliance infrastructure development requires investing in policies, training, monitoring systems, and potentially compliance personnel or consultants who provide expertise most provider organizations lack internally. The cost of building robust compliance programs pales compared to the transaction value destroyed when deals collapse over compliance issues.
Operational tightening involves addressing the detailed ownership, accounting, tax, workforce, and licensure issues Bechen identified. Much of this work requires professional advisors—attorneys, accountants, and consultants—who can identify problems and implement solutions before buyers discover them.
The alternative to preparation is reactive scrambling when buyers raise concerns during due diligence, often under time pressure with deals at risk. That’s the worst context for addressing problems, and outcomes frequently disappoint sellers.
The Buyer’s Market Reality
While 2021 may bring increased buyer interest in behavioral health generally, individual providers shouldn’t assume they’ll attract competitive offers regardless of quality. The factors Rudsenske and Bechen identified as turn-offs for buyers will eliminate many potential targets from consideration.
Providers with clinical care that doesn’t meet standards, operational dysfunction, compliance vulnerabilities, or dysfunctional workforces will struggle to find buyers willing to assume those problems. Those who do find buyers will likely face deeply discounted valuations that reflect the risk and remediation costs buyers must absorb.
By contrast, providers with strong clinical models, robust compliance infrastructure, clean operations, and engaged workforces will find themselves courted by multiple buyers competing on valuation and terms. In any M&A market, quality assets command premiums while troubled assets struggle.
For SUD providers navigating 2021, the message is clear: if you want to be an attractive acquisition target, invest now in the clinical excellence, compliance infrastructure, and operational sophistication that buyers demand. The alternative is watching competitors capture premium valuations while you struggle to generate interest or face embarrassing deal failures when buyers discover problems during due diligence.
The good news is that everything buyers value—clinical quality, compliance, operational excellence—also makes providers better at their core mission of helping people recover from addiction. Preparing for eventual transactions and simply being a better treatment provider align perfectly. The work that positions organizations for successful M&A also delivers better patient outcomes, stronger employee satisfaction, and more sustainable business performance.
That’s the best kind of preparation: improving in ways that create value whether or not a transaction ever materializes.
