As economic headwinds reshape the behavioral health landscape in 2023, providers are rethinking how to expand. Smaller tuck-in acquisitions have traditionally been a popular way to grow quickly, but rising costs, staffing challenges, and the complexity of mergers and acquisitions (M&A) are prompting many operators to consider alternative strategies. For larger organizations, this has meant slowing M&A activity in favor of de novo expansions—opening new facilities from scratch as a faster and more cost-effective path to growth and achieving organic growth in mental health.
Tuck-in acquisitions require significant effort, including extensive due diligence, legal reviews, and relationship-building. Even then, deals may fail to meet expectations. For providers focused on strategic growth, investing in organic growth in mental health can offer a more controlled approach. Opening a new location allows operators to retain full operational control, build their brand culture, and avoid overpaying for an acquisition that may underperform.
“A small deal takes as much work to get done as a big deal takes to get done,” said Peter Nystrom, chief commercial officer at Nystrom & Associates, during Behavioral Health Business’ INVEST event. “You see a lot of larger groups thinking, ‘Do I want to dwell on this acquisition, or pull back and focus on a de novo strategy?’ So acquisitions really have to make sense for our groups in order to do it.” Founded in 1991, Nystrom & Associates operates behavioral health locations across Minnesota, Iowa, and Wisconsin.
Public Companies Shift Toward Organic Growth
The trend toward de novo expansion is also evident among public behavioral health companies. LifeStance Health Group Inc. (Nasdaq: LFST), a national provider, is moderating its M&A activity in 2023 to focus on organic growth in mental health. “We are intentionally moderating M&A as we continue our shift toward organic growth,” CEO Ken Burdick said during the company’s Q3 earnings call.
By focusing on organic growth in mental health, operators can achieve similar market presence to acquisitions but at lower cost. Nystrom notes that if more organizations embrace this approach, demand for smaller tuck-in acquisitions may decline, potentially driving down valuations for those assets. PitchBook reports that multiples in the behavioral health sector are already cooling, largely due to staffing limitations slowing overall market growth rather than shifts in deal activity.
Managing M&A Risk
Despite the potential advantages of acquisitions, the risks remain significant. Behavioral health valuations peaked in 2021, making overpayment a real concern. “You’ve got to really make sure that [your dealmaking team has] done the diligence,” said William Hartje, chief development officer at Refresh Health, which operates more than 300 locations across 37 states. “There could be some pain if you pay such high prices for something that maybe pans out not to be what you expected. … So I would expect that there’s going to be some misses.”
Even promising deals can take months to complete. Nystrom compares acquisitions to dating: building relationships, completing legal reviews, and conducting due diligence can require extensive time with no guaranteed payoff. That same time, he notes, could be invested in marketing, recruiting, and opening new locations to pursue organic growth in mental health.
Gaurav Bhattacharyya, CEO of Geode Health, stresses the importance of working with motivated sellers to avoid wasted effort. “Sometimes it’s because they just don’t want to do it. That’s where the value of a broker-lead process is valuable because you know that that seller is motivated to move forward,” he said. Founded in 2017 by global investment firm KKR, Geode Health provides in-person and virtual outpatient treatment across the U.S.
When Acquisitions Make Strategic Sense
While de novos are attractive for cost and speed, acquisitions remain strategically valuable in certain scenarios. Providers seeking rapid expansion into new markets or access to established referral networks may find it easier to acquire an existing provider. “For the de novos to be successful, you do need the market reputation, you need relationships with the referral ecosystem,” Bhattacharyya said.
Due diligence is key to ensure cultural and operational alignment. Nystrom emphasizes engaging with potential sellers early in the process rather than relying solely on data spreadsheets. “We’re going to get to know them right away rather than looking at a pipeline with names on a spreadsheet saying, ‘Okay, they look good on paper, but functionally, do they look good?’ Are they good in person, so you can really understand the quality, how they feel about going forward [with the process], how long the owner wants people in the business for?”
A Fragmented Market Brimming with Opportunity
The behavioral health market remains highly fragmented, creating opportunities for both de novo expansions and strategic acquisitions. Bhattacharyya predicts that smaller roll-up deals may continue to dominate while large platform acquisitions remain limited. Operators can leverage acquisitions selectively while continuing to pursue organic growth in mental health to strengthen their presence in existing markets.
For behavioral health providers, 2023 presents a strategic choice: invest time and capital in potentially high-risk acquisitions or pursue more controlled, cost-effective growth through de novos. Both approaches can expand market presence, but the right path depends on risk tolerance, available resources, and long-term growth objectives. Providers that focus on organic growth in mental health may benefit from lower costs, faster implementation, and greater operational control, positioning themselves for sustainable success in an evolving and competitive market.
The coming months may reveal whether de novo growth becomes the dominant strategy or whether smaller, carefully vetted tuck-in acquisitions continue to play a critical role in the evolving behavioral health landscape. One thing is clear: operators must approach each growth decision thoughtfully, balancing risk, cost, and speed to achieve sustainable expansion in a complex and competitive market.
