In the previous blog we looked at the strong growth trends in the behavioral health market, both pre- and post-COVID. That has created an enormous opportunity for mergers and acquisitions in the industry, both for providers looking to sell or expand and cash-rich investors seeking to benefit from the trends.

The behavioral health market is highly fragmented, always a catalyst for consolidation. According to a 2018 report by the Substance Abuse and Mental Health Services Administration (SAMHSA), there were more than 14,000 for-profit behavioral health and substance abuse facilities in the U.S. Similarly, as of 2019, there were 12,472 registered mental health treatment facilities in the U.S., according to Statista. Many if not most of them are small, with estimated average revenue per facility of about $1 million, according to Duff & Phelps.

Consolidation offers health care providers the opportunity to expand their patient reach and offer more services, which leads to higher revenue, while increased scale creates more efficiencies and improved profit margins. That in turn attracts investors, mainly private equity firms, to get into the business, as we’ve already seen happening. It also offers providers who want to cash out an opportunity to do so.

In fact, according to an article in Behavioral Health Business, “nearly a quarter of healthcare CFOs say their organizations plan to get out of the behavioral health game,” citing a report by the BDO Center for Healthcare Excellence & Innovation. Yet, “despite the divestiture trend, 50% of respondents said they plan to invest in behavioral health services.”

That has driven deal-making in the sector to what looks likely to be a record in 2021, based on first quarter results, Behavioral Health Business said. The news site reported 54 deals in the space in Q1, compared to nearly 100 for all of 2020, when deal-making was temporarily restrained by the pandemic, which reduced travel for much of the year.

Since then, however, investors have been making up for lost time. The combination of lots of dry powder, low interest rates, and ample consolidation opportunities are fueling the deal surge. But that surge will not last forever. Eventually, as we have seen in other industry sectors, many of the best companies will be picked off early on – and at the highest valuations – so those who wait may find that the prices they were hoping to attract are no longer available.

But there is another reason not to wait too long. In addition to these market drivers, the Biden Administration’s proposed hike in the capital gains tax rate is spurring behavioral health providers and their prospective investors to get deals done before any such increase goes into effect. The White House has floated raising the tax rate to 43.4% from 23.8% currently. Should that become law, that could reduce the net proceeds from a company sale by more than 20%, according to some estimates. Companies looking to sell are therefore strongly advised to do so before and if higher tax rates are enacted.

Next Steps

If you are considering the sale or expansion of your behavioral health care business or looking to raise capital, feel free to me directly to explore your options and how we can help. All conversations are strictly confidential with no obligation.

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To learn more about private equity’s growing interest in behavioral health businesses and the selling opportunities available to clinical owners, download our comprehensive white paper: Behavioral Health Has Captured the Interest of Private Equity


Photo: Eric YetterEric Yetter

FOCUS Managing Director and Healthcare Team Leader

Direct: 615-477-4741


Eric Yetter is an investment banker focused on healthcare. His practice includes healthcare services, outsourced services, medical devices, and healthcare IT. Mr. Yetter has completed a variety of healthcare transactions, many with private equity firms and PE-backed companies. His past clients include leading physician groups, healthcare facilities, and institutional healthcare investors. Contact Eric at 615.477.4741.