In the fast-evolving behavioral health market, buyers and sellers often operate on parallel tracks that don’t always intersect. Enthusiasm can ignite early in healthcare dealmaking discussions, only to fizzle as parties realize their expectations don’t align. Many promising transactions stall or fall apart, leaving both sides to go their separate ways.
In 2022, this dynamic was especially pronounced. Buyers and sellers frequently clashed over valuations, making it difficult to find common ground. Regulatory uncertainty or other unforeseen obstacles also prevented deals from coming together, leaving companies to pause or abandon acquisition discussions. But while some opportunities were missed, industry insiders believe 2023 could bring renewed possibilities, as both buyers and sellers revisit previously stalled deals in healthcare dealmaking.
Revisiting Stalled Deals
Rush Brady, AVP of development at Odyssey Behavioral Health, stressed the importance of staying engaged. “It’s always important that we follow up and stay engaged, stay in touch with those folks,” he said during a recent Behavioral Health Business webinar sponsored by The Braff Group. “Those opportunities [to acquire a perfect fit] are few and far between.”
Odyssey Behavioral Health, founded in 2015, operates 12 residential treatment centers and 19 outpatient locations, providing a mix of services including psychiatry, eating disorder treatment, and general outpatient care. For operators like Odyssey, returning to previously stalled transactions isn’t just strategic—it’s essential for growth in a competitive market. This approach is at the core of successful healthcare dealmaking.
As the behavioral health market matures, the potential for revisiting deals increases. Valuations that were once prohibitively high may now fall within reach, creating a window for buyers to acquire companies that may have been out of budget just a year ago.
Investor Interest Remains Strong
Despite short-term market fluctuations, investor interest in behavioral health is projected to remain strong for the foreseeable future. John Hennegan, founding partner of Shore Capital, shared his perspective during the webinar: “While there may be some near-term choppiness, the next 10 to 20 years look incredibly rosy for behavioral health, and we think that’s what’s driving so much interest.”
Shore Capital, based in Chicago and Nashville, has raised roughly $1.3 billion in capital for healthcare businesses since 2009, and its behavioral health investments include companies such as BrightView and Behavioral Innovations. Hennegan highlighted the sector’s broad appeal, noting that declining stigma, increased awareness, and generational acceptance of mental health services have created a strong, long-term tailwind for investment. This alignment of market conditions is one reason healthcare dealmaking in behavioral health continues to attract attention.
“It’s hard to find many sectors of the economy that show the same tailwinds and growing acceptance as behavioral health,” Hennegan explained. “We just see declines in stigma and growing acceptance from the older generations, down to a younger generation that has grown up in an environment where behavioral health is something they’re comfortable talking about and utilizing the services.”
Behavioral Health Market Snapshot
The behavioral health M&A market cooled slightly in 2022 compared to the record-breaking frenzy of 2021, but activity remained robust. According to The Braff Group, a Pittsburgh-based M&A firm specializing in healthcare, there were 201 behavioral health deals in 2022. While this number was down from 256 deals in 2021, it still marked a 4% increase from 2020, making 2022 the second-most active year for behavioral health transactions on record.
Within the broader sector, mental health and substance use disorder services were the most active areas, accounting for 61 and 65 deals respectively. Autism services, by contrast, saw a slight decline in transaction volume between 2021 and 2020. Dexter Braff, president of The Braff Group, emphasized that behavioral health remains the hottest area of investment in healthcare today. “It is, by far, the most active segment now,” he said during the webinar. For companies engaged in healthcare dealmaking, this activity represents both competition and opportunity.
Declining Valuations: A Reset for Buyers
While deal activity remains strong, valuations are moderating after the high premiums seen in 2021 and early 2022. Hennegan compared the market to real estate, noting that higher costs of debt naturally lead to lower purchase prices. Just as a home buyer cannot pay the same amount for a property when mortgage rates increase, behavioral health buyers must adjust their expectations in light of rising financing costs.
Prior to 2021, providers typically sold for 4 to 6 times EBITDA. During the peak M&A activity, valuations occasionally exceeded 10 times EBITDA, creating barriers for many potential buyers. As valuations reset, previously stalled deals are becoming viable once again. Brady noted that Odyssey Behavioral Health has already seen this trend firsthand: “We’ve seen a couple of processes that we participated in last year, or maybe sellers we’ve had conversations with, who we couldn’t quite get there [with], and they’re coming back around and re-engaging with us.” This demonstrates how careful follow-up is essential in healthcare dealmaking.
For operators, smaller acquisitions can be an effective route to growth. Brady shared that Odyssey has historically pursued one or two tuck-in acquisitions per year while simultaneously focusing on organic expansion.
The Right Fit Matters
While valuations and timing are critical, the right strategic fit is equally important in behavioral health transactions. Hennegan recalled Shore Capital’s early experience with BrightView. Initially, the provider chose another buyer over Shore due to perceived advantages elsewhere. However, once BrightView realized that their initial choice lacked behavioral health experience and did not understand the nuances of their operations, they reopened discussions with Shore, resulting in a successful partnership.
Dexter Braff underscored the importance of identifying “backup buyers,” noting that they account for 10–15% of deals. “Going back to the second buyer is crucial,” he said. “That’s why it’s so important that parties do their very, very best to always be respectful … because you might get another shot at it – either from the buy side or the sell side.” For anyone involved in behavioral health, understanding the dynamics of healthcare dealmaking can be the difference between a missed opportunity and a strategic win.
Looking Ahead: A Decade of Opportunity
Industry experts agree that the behavioral health sector is poised for sustained growth, fueled by continued demand for mental health and substance use services, broader societal acceptance, and a maturing market. While 2023 may bring some market volatility and resetting of valuations, it also presents an opportunity for both buyers and sellers to revisit previously stalled deals and form strategic partnerships that align with long-term growth.
As Brady concluded, “Those opportunities are few and far between. If you see a company that’s the right fit, it’s worth staying engaged and exploring every avenue to make it work.” For companies navigating the behavioral health M&A landscape, second chances are not just possible—they may define the next wave of industry success. And with the right approach, healthcare dealmaking can unlock tremendous growth and lasting value.
