The behavioral health acquisitions landscape is facing a period of adjustment as the broader financial climate cools, potentially limiting the occurrence of mega deals in the coming year. Industry insiders, however, believe that investor appetite for smaller transactions remains healthy, keeping the mid-market sector active even amid economic uncertainty.
“I think that buyers will get more selective, but I think the demand is still [there],” Kevin Taggart, managing partner at Mertz Taggart, said during Behavioral Health Business’ INVEST conference. “We still see a tremendous amount of demand every time we take a company to market, so I think that equation still keeps them at least flat. I don’t think they’re going to go up.”
Taggart’s firm, founded in 2006 and based in Fort Myers, Florida, specializes in healthcare M&A and has completed more than 100 transactions since its inception. Mertz Taggart’s perspective provides valuable insight into the sector, reflecting a nuanced understanding of how investor behavior is adjusting in response to current financial conditions.
Slower Market Compared to 2021’s Boom
The behavioral health M&A market has experienced a noticeable slowdown since the record-breaking year of 2021. That year, the sector saw 158 deals, a level not repeated in subsequent years. By the first half of 2022, the number of transactions had fallen to 70, according to Mertz Taggart data. While this represents a significant decline, the mid-market segment—transactions valued between $10 million and $100 million—remains resilient, according to Christal Contini, chair of the M&A practice group at McDonald Hopkins LLC.
“[The] pressure in the market, it’s obviously going to have an impact on transactions, but the world … I play in is predominantly in the transaction value of between $10 million and $100 million,” Contini said at INVEST. “So for that space, I have not actually seen a slowdown. It’s as busy as it was six to 12 months ago.”
McDonald Hopkins, a 150-attorney law firm with offices across Ohio, Michigan, Florida, Maryland, and Illinois, has extensive experience in guiding both buyers and sellers through complex healthcare transactions. Contini’s observations highlight that while headline-grabbing mega deals may be less frequent, the fundamental appetite for behavioral health acquisitions remains robust.
Lending Headwinds and Deal Structuring
A key factor influencing deal size is the current lending environment. Following the exuberance of 2021, banks and lenders are now adopting a more cautious approach as they navigate a potential bear market. Morris Estes, managing director at Capital One Healthcare, outlined the scale of the shift:
“This year, leveraged loan volume is down 50%, refinancings are down 75% on dividend deals, and our dividend recaps are down 92%,” Estes said during the INVEST conference. “A lot of lenders are really taking a step back, being very cautious about how they deploy their capital.”
The tightened lending environment means that larger, highly leveraged transactions are harder to finance, which may lead acquirers to scale down deal sizes. However, Estes notes that smaller deals and incremental term loans still have room to move forward, even if the megadeal market remains subdued.
“Even in those cases, it’s going to be tough for mega deals to get done while the secondary market has traded down so low,” Estes added. Capital One Healthcare, a Virginia-based medical investment bank, continues to see activity in mid-sized transactions where financing structures are more flexible and risk is better managed.
Growing Interest in Outpatient and Digital Behavioral Health
Despite an overall slowdown, certain areas within behavioral health are seeing increased M&A activity, particularly in mental health and outpatient services. According to Mertz Taggart data, the first half of this year has already seen 43 mental health transactions, up from 25 in the same period of 2021.
Outpatient mental health providers, in particular, have captured investor attention. One of the largest acquisitions of the year involved UnitedHealth Group’s Optum division purchasing Refresh, an outpatient mental health provider.
“We’re keeping much busier with outpatient mental health,” Taggart explained. “I think it is because of the Refreshes and the LifeStances of the world that there’s been a lot of groups trying to roll those up. And so we’ve seen that in our practice as well.”
Digital behavioral health platforms are also on the radar of investors. These companies offer virtual services ranging from teletherapy to digital monitoring and care coordination. While they present significant growth potential, questions remain about long-term sustainability and effectiveness. Rush Brady, AVP of development at Odyssey Behavioral Health, cautioned that virtual platforms may not always meet the complex needs of clients with high acuity:
“I think it just brings a lot of risks. And don’t get me wrong, there’s a lot of successful companies doing very well. And I think there’s a need for virtual services. We’re just not sure with the acuity of our clients that it’s an effective sort of standalone platform.”
Odyssey Behavioral Health, founded in 2015 and operating 12 residential treatment centers and 19 outpatient locations, provides psychiatry, eating disorder treatment, and a variety of outpatient services. Brady’s comments highlight the importance of evaluating both clinical outcomes and business models when considering behavioral health acquisitions.
Employment Models and Compliance Challenges
One of the ongoing challenges for buyers in the digital behavioral health space is the workforce model employed by these companies. Many digital providers rely on 1099 contractors rather than full-time employees. While this model offers flexibility and cost savings, it can introduce compliance and billing complexities that investors must navigate.
Contini explained the dilemma for potential buyers:
“So then a buyer comes in and now they are thinking, ‘Okay, what do I need to do in order to make this business successful into the future?’ And the buyer starts thinking, ‘Well, maybe I need to actually make them all employees just so that I can have the policies in place.’”
Switching from a contractor-based workforce to full-time employees can raise operational costs, potentially reducing EBITDA and affecting the perceived profitability of the business. Additionally, many clinicians prefer the flexibility of 1099 work, meaning a shift to full-time employment could create retention challenges.
“So it is a bit of a catch 22,” Contini noted. Buyers must weigh compliance and operational stability against cost and workforce satisfaction, making M&A deals in the digital space more complex than they might initially appear.
Trends Shaping Behavioral Health Acquisitions
Several trends are influencing investor behavior and the types of transactions likely to occur in the near term:
- Mid-Market Resilience: While mega deals may be limited, mid-market transactions ($10M–$100M) remain active, with consistent buyer interest.
- Outpatient Mental Health Growth: Investors continue to prioritize outpatient providers due to scalable models and strong demand.
- Digital Health Considerations: Virtual care platforms are attractive, but long-term sustainability, clinical efficacy, and workforce compliance are critical considerations.
- Financing Limitations: Tighter lending conditions reduce the availability of highly leveraged deals, steering investors toward smaller, more manageable transactions.
- Workforce Models: Decisions around 1099 contractors versus full-time employees affect both operational costs and retention, influencing deal structure and valuation.
Looking Ahead
For sellers considering putting their behavioral health company on the market, understanding these dynamics is critical. While market conditions may limit the number of blockbuster deals, strong interest persists in smaller and mid-market transactions, especially those with solid operational models and growth potential. Buyers are becoming more selective, scrutinizing workforce structure, clinical outcomes, and long-term profitability.
Investors and operators alike should also keep an eye on outpatient mental health, which continues to be a major driver of behavioral health acquisitions. Successful acquisitions often involve companies with scalable operations, integrated care models, and the ability to adapt to shifting reimbursement or regulatory environments.
Digital behavioral health remains an area of both opportunity and caution. Platforms that can balance virtual services with robust clinical oversight and regulatory compliance are likely to attract continued investment. Companies relying heavily on contract labor may need to reconsider their workforce models to meet investor expectations, but must also carefully manage clinician retention to avoid destabilizing operations.
Conclusion
The behavioral health M&A market is entering a period of recalibration. Mega deals may be fewer, driven by tighter lending conditions and economic uncertainty, but the mid-market remains active, fueled by strong demand for outpatient and mental health services. Investors are increasingly focusing on operational efficiency, workforce models, and digital health integration when evaluating potential acquisitions.
As the market evolves, buyers and sellers must navigate a complex landscape of financing constraints, regulatory requirements, and workforce considerations. The ability to adapt to these challenges while maintaining quality care and operational efficiency will be key to achieving successful outcomes in behavioral health acquisitions in the years ahead.
While 2021 may have set the bar high for headline-grabbing deals, 2025 and beyond are shaping up to be years where strategic, smaller transactions define the sector, ensuring continued growth and innovation in behavioral health services.
The focus on outpatient services and digital platforms suggests that behavioral health acquisitions will continue to evolve, emphasizing scalable models, high-quality care, and sustainable workforce structures. For investors and operators alike, understanding these trends will be crucial to navigating this dynamic market.
