The behavioral health sector experienced a major wave of M&A activity during and shortly after the COVID-19 pandemic. However, since 2022, the landscape has shifted dramatically, giving rise to new Behavioral Health M&A Trends that are reshaping how deals get done. Buyers and sellers are now seeking creative deal structures—such as seller notes and earnouts—to bridge gaps in valuation expectations and close transactions.
In a recent Behavioral Health Business webinar, leading experts shed light on how these deal structures are impacting Behavioral Health M&A Trends and what participants should be cautious about in today’s market.
“There absolutely has been a slowdown in M&A activity really since 2022. And there continues to be a real gap in valuation expectations between buyers and sellers,” said Amy O’Keefe, a partner at Nixon Peabody. “We’re seeing a lot of buyers try to bridge that gap by using things like seller notes and earnouts … These structures impact the value and the dollars sellers put into their pocket at closing.”
Seller Notes: A Growing Feature of Behavioral Health M&A Trends
Among the most significant shifts in M&A Trends is the growing reliance on seller notes. A seller note allows a buyer to defer part of the purchase price, agreeing to pay it back over time rather than delivering the full amount at closing.
While seller notes can make deals more attractive to buyers with limited cash on hand, they also introduce real risks for sellers. Amy O’Keefe points out several critical considerations:
- Interest Rates: Without interest, the value of a seller note diminishes over time.
- Financial Stability: Sellers must assess the buyer’s ability to pay down the line.
- Payment Timeline: Longer repayment periods heighten risk and uncertainty.
In today’s Behavioral Health M&A Trends, seller notes are often a necessary compromise—but one that sellers must enter carefully and with full due diligence.
Earnouts: A Double-Edged Sword in Today’s Deals
Another defining characteristic of recent Behavioral Health M&A Trends is the increased use of earnouts. With earnouts, sellers receive part of the purchase price only if the business meets specific post-closing performance targets.
Ted Jordan, managing director at The Braff Group, offered a candid perspective:
“To be honest with you as a seller…cash at closing is always better than a note, and a note is generally better than an earnout. But that doesn’t always fit the circumstances.”
Earnouts align incentives between buyers and sellers but introduce uncertainty. Market disruptions, regulatory changes, or strategic investments made by the buyer post-acquisition can all impact whether those performance targets are met.
As M&A Trends evolve, sellers must ensure that any earnout provisions are clearly defined and realistically achievable to protect their financial interests.
Regulatory Risks: A Crucial Layer in Behavioral Health M&A Trends
Regulatory compliance adds an additional layer of complexity to Behavioral Health M&A Trends. Behavioral health operators frequently work with Medicaid, Medicare, and other government payors, and transactions are subject to strict rules regarding payment for referrals.
“There’s definitely healthcare regulatory risks, especially in behavioral healthcare,” noted Jéna Grady, a partner at Nixon Peabody.
Earnouts structured improperly could be viewed as illegal incentives for patient referrals, putting both buyers and sellers at serious legal risk. Navigating these issues correctly is critical for anyone participating in Behavioral Health M&A Trends today.
Operational Risks: The J-Curve Challenge
Beyond legal and financial risks, Behavioral Health M&A Trends reveal another challenge—misaligned operational incentives.
Steve Garbon of The Braff Group explained that when buyers take over a behavioral health business, they often invest heavily in infrastructure upgrades, staffing, and expansion. While these investments are good for the long-term success of the company, they often cause short-term profitability (EBITDA) to dip—a phenomenon known as the J-curve effect.
“When you have a year or two year earnout that could be impactful to you not hitting your earnout, even though it’s all really going to make the business more profitable,” Garbon said.
For sellers, understanding the buyer’s post-closing plans is essential in M&A Trends where earnouts are involved. Otherwise, short-term losses could jeopardize significant future payouts.
Best Practices for Navigating Behavioral Health M&A Trends
Given these complexities, experts emphasize a few best practices to successfully navigate Behavioral Health M&A Trends:
- Keep Deal Structures Simple: Avoid unnecessary complexity that could cause disputes.
- Set Clear Performance Metrics: Define earnout milestones objectively and clearly.
- Perform Rigorous Due Diligence: Understand the buyer’s financial position and post-closing strategy.
- Account for Regulatory Compliance: Ensure deal structures are aligned with healthcare laws to avoid penalties.
Ultimately, simplicity, clarity, and proactive risk management are key to protecting both buyers and sellers in today’s evolving M&A Trends.
Conclusion: Adapting to a New Reality in Behavioral Health M&A Trends
The behavioral health sector continues to offer significant opportunities for growth and investment, but today’s deals look very different from those during the post-pandemic boom. Alternative structures like seller notes and earnouts have become essential tools for bridging valuation gaps—but they also bring heightened risk.
Navigating Behavioral Health M&A Trends requires flexibility, diligence, and the support of experienced advisors who understand both the financial and regulatory nuances of the healthcare sector.
For those willing to adapt to these new realities, the rewards can be substantial—but caution, preparation, and strategic thinking are more important now than ever before.
