The behavioral health sector has experienced significant M&A activity in 2025, fueled by growing investor interest and heightened demand for services. Having worked with numerous behavioral health operators across various M&A transactions, I've seen firsthand how success in this space requires far more than standard due diligence. From complex reimbursement structures to specialized clinical considerations, the details can make or break both the deal itself and the long-term integration.
Whether you're considering an exit strategy or evaluating a new acquisition, preparing for due diligence can dramatically increase the odds of a smooth transaction. Many of the issues we'll cover can be addressed before a sale or purchase process begins, allowing sellers to position themselves more favorably and buyers to make informed, confident decisions. What follows is a deep dive into the most critical components of behavioral health due diligence, expanded to capture the full detail that this sector demands.
Financial Considerations
The financial review is often the first stop in due diligence, but in behavioral health, it carries more weight than just verifying profit margins. Revenue cycles, payor mix, and cash conversion timelines all reveal how well an organization can translate care into sustainable growth. Looking beneath the topline numbers ensures that both parties understand the true financial dynamics at play and the potential risks hiding within the balance sheet.
Key areas of focus include:
Payor mix stability. Evaluate the composition of revenue across commercial insurance, Medicaid, Medicare, and cash-pay. Overreliance on a single payor type can leave a facility vulnerable to policy shifts or contract renegotiations.
Revenue recognition patterns. Examine timing differences between service delivery and cash collection. Behavioral health facilities often face 60–120 day collection cycles, making timing analysis critical.
Revenue per patient day. Review revenue by program level and payor to identify where margins are compressing or expanding.
Seasonality. Look for patterns tied to deductible resets, school-year cycles, or holiday periods, which can influence census and revenue.
Cash conversion cycle. Track the time from patient admission through pre-authorization delays, billing, and reimbursement. This reveals whether your business can reliably turn services into cash.
Working capital requirements. Review AR aging, bad debt reserves, and seasonal cash flow fluctuations to anticipate capital needs.
Capital expenditures. Distinguish between maintenance capex (typically 2–4% of revenue) and growth capex tied to expansion. This helps assess both sustainability and investment potential.
From a transaction advisor's lens, these insights drive valuation support, working-capital targets, and purchase price mechanics, and they inform debt capacity and covenant design post-close. In short, the numbers shape both price and the path to realizing it.
Regulatory Compliance Audit
Compliance is the bedrock of a behavioral health operation. Unlike some industries where minor missteps can be corrected quietly, regulatory failures here often have immediate and public consequences. Fines, license suspensions, or reputational damage can unravel years of progress. That's why a comprehensive compliance audit is non-negotiable: It assures that a behavioral health organization is not just meeting today's standards but also prepared for tomorrow's regulatory shifts.
Critical review points include:
Licensure. Confirm valid and current licensure for all levels of care, noting any restrictions, probationary periods, or historical lapses.
DEA registration. For facilities offering medication-assisted treatment, verify that protocols around substances such as buprenorphine and methadone meet both federal DEA and state-specific standards.
Accreditations. Review Joint Commission, CARF, and LegitScript statuses, paying attention to citations, corrective action plans, and timelines for resolution.
Privacy protections. Confirm HIPAA and state-specific compliance. Privacy breaches carry both legal and reputational risks.
Telehealth compliance. As virtual care expands, ensure alignment with evolving telehealth regulations. Non-compliance here is increasingly scrutinized.
Investigations. Check for pending or historical inquiries from CMS or state health departments that could impact operations.
M&A advisors help behavioral health organizations frame their compliance profile as a strength in the sale process. A clean compliance record allows for streamlined diligence and keeps negotiations focused on value. Where there are gaps, we work with management to address issues early or design transaction structures — such as tailored representations, escrow reserves, or specific closing conditions — that protect both sides without putting the deal at risk.
Clinical Outcomes
Clinical outcomes provide a window into the quality and effectiveness of behavioral health care being delivered. For prospective buyers, outcomes are not just clinical measures but business indicators that affect reimbursement, reputation, and long-term viability. Evaluating them in context helps distinguish between facilities that achieve true patient improvement and those that simply manage census numbers.
Key areas include:
Program-specific performance. Break down completion rates by program type (inpatient, outpatient, intensive outpatient (IOP), detox). Blended averages often conceal underperforming segments.
Readmission analysis. High readmission rates may suggest inadequate aftercare, premature discharges, or clinical shortcomings. Root cause analysis helps distinguish between clinical versus operational drivers.
Benchmarking. Compare outcomes with industry standards set by SAMHSA or NIDA. This provides context for performance and improvement opportunities.
When an M&A firm like mine (VERTESS) works with sellers, we emphasize that strong clinical outcomes do more than demonstrate quality of care. They directly support valuation. Solid outcome data strengthens quality-of-earnings analyses, positions the organization favorably in payor discussions, and highlights programs that deserve continued investment. By framing outcomes this way, we help sellers show buyers not just where the business is today, but where future growth and returns can be realized.
Payor Relationship Analysis
No two payor relationships are alike, and in behavioral health, these relationships often determine financial stability. From contract terms to denial rates, payors hold significant influence over how predictable and sustainable revenue streams will be. Diligence in this area uncovers whether the organization has built trust with its payors or if challenges could undermine growth.
Essential review items include:
Authorization approval rates. Examine approval rates by individual payor. Significant differences between insurers can reveal relationship challenges.
Claims management. Look at denial patterns, denial reasons, and appeal success rates. These metrics reveal both billing accuracy and the quality of documentation.
Contract terms. Assess reimbursement rates, renewal timelines, rate-reduction clauses, and exclusivity provisions that could affect future revenue.
Balance of in- and out-of-network billing. Overreliance on out-of-network arrangements may boost revenue short-term but creates long-term risk as policies shift.
Concentration risk. Flag situations where a single payor drives a disproportionate share of revenue.
For buyers and sellers, this analysis anchors revenue durability and shapes renegotiation strategies. It also signals when to employ earnouts or other downside protections, so the deal's economics reflect real contract risk.
Staffing Considerations
Behind every behavioral health facility are the people who deliver care. Unlike many industries, staffing in this sector directly shapes both compliance and clinical outcomes. High turnover, stretched ratios, or insufficient training can ripple outward, eroding the likes of quality, patient satisfaction, and financial performance. That's why staffing diligence is not just about numbers on a chart but about evaluating the culture and systems that support the workforce.
Key considerations include:
Staffing ratios. Compare clinician-to-patient ratios with ASAM and other standards. Ratios directly impact quality and safety.
Turnover analysis. High turnover suggests cultural or compensation problems, driving up costs and reducing consistency of care.
Clinical supervision. Supervisors must meet licensing requirements and maintain continuing education. Effective supervision also drives staff retention.
Credentialing. Ensure all providers are properly credentialed with both regulators and payors.
Specialized training. Review programs for co-occurring disorders, which are prevalent in behavioral health and require advanced expertise.
For sellers, staffing reviews highlight strengths and gaps that buyers will scrutinize. Addressing issues in advance, whether in recruitment, supervision, or compensation, helps position the organization as stable, compliant, and ready to scale after the transaction.
Census & Referral Sources
A healthy census and diverse referral base are among the clearest signals of operational strength for a behavioral health organization. Unlike financial statements, which reflect the past, census data and referral networks point directly to the future. They reveal whether the organization can maintain its patient flow consistently, or whether it is vulnerable to sudden drops when a key referral source dries up.
Important checkpoints include:
Census performance. A rolling 36-month census review reveals trends beyond seasonal fluctuations. Pay close attention to occupancy consistency, average daily census, and utilization by service line.
Referral source diversification. Reliance on any single source for more than ~15% of admissions creates risk. Common vulnerabilities include dependence on one hospital, physician group, or marketing vendor.
Length of stay. Analyze by payor, acuity, and treatment modality to uncover optimization opportunities.
Waitlist accuracy. Verify waitlist data and conversion rates to confirm whether demand is genuine or inflated.
Risk mitigation. Assess geographic diversity of referrals and verify that marketing practices avoid "patient brokering" violations.
From a seller's perspective, census and referral data provide the evidence buyers need to underwrite growth. Demonstrating consistent trends and diversified sources strengthens the valuation case and gives buyers confidence in near-term market development.
Technology & Data Systems
Technology in behavioral health is no longer just about convenience. It's a backbone for compliance, efficiency, and patient care. Facilities are under pressure to track outcomes, manage privacy concerns, and streamline operations in ways that were not expected a decade ago. The right systems can transform an organization's ability to grow and compete, while outdated or poorly integrated platforms can create hidden costs and compliance risks.
Critical areas include:
EHR functionality. Systems should support behavioral health-specific workflows, including ASAM assessments, group therapy notes, and individualized treatment planning.
Outcomes tracking. Real-time reporting and data accuracy are vital for decision-making and demonstrating value to payors.
Interoperability. Integration with payor platforms streamlines billing, authorizations, and data exchange.
Privacy and security. Given the sensitivity of behavioral health records, strong security protocols are non-negotiable.
From a deal standpoint, demonstrating tech readiness helps sellers set realistic integration timelines, clarify capital expenditure needs, and address cybersecurity representations, thereby reducing buyer concerns and helping prevent surprises after closing.
Additional Strategic Considerations
Even the strongest operations can stumble if broader strategic factors are overlooked. Reputation in the community, positioning against competitors, and compliance with local regulations all play subtle but powerful roles in determining long-term success. Due diligence that ignores these elements risks missing deal-breakers hiding in plain sight.
Key items include:
Reputation. Online reviews, litigation history, and media coverage can reveal patient satisfaction trends or ethical issues.
Market position. Assess local competition and demand forecasts to understand growth potential and sustainability.
Real estate and zoning. Confirm that treatment facilities, group homes, and sober living residences comply with local zoning ordinances, which can vary significantly.
Addressing these factors early reduces surprises in confirmatory diligence and keeps the path to a transaction's close — and the post-close value-creation plan — clean and credible.
Integrating Excellence in Behavioral Health M&A Due Diligence
Behavioral health transactions require diligence that goes far deeper than a standard healthcare checklist. From financials and compliance to outcomes and staffing, each area is nuanced and interconnected. Expanding the scope of review to cover every one of these domains provides a full picture of organizational health.
At VERTESS, our specialized approach to behavioral health transactions and guiding clients through due diligence helps ensure that every component receives appropriate attention and analysis. With the changing landscape within behavioral health, it's important to stay current with regular changes and take the necessary time to review each opportunity carefully.
Connor Cruse, CM&AA
As a Managing Director at VERTESS, I advise founders, executives, and investors on mergers and acquisitions (M&A) within healthcare services, with a focus on Behavioral Health, Mental Health, Addiction Treatment, and Outpatient Services. I guide clients through the entire transaction lifecycle, from initial valuation and positioning to buyer outreach, diligence, and final negotiation, whether they’re preparing for a strategic exit, recapitalization, or acquisition.
My experience spans both sell-side and buy-side mandates, representing operators across the U.S., from specialized behavioral health providers to multi-site medical groups. My work is grounded in deep financial analysis, market intelligence, and a hands-on approach to every deal.
Prior to VERTESS, I held senior advisory roles at Iconic and Coast Group, where I built scalable M&A processes and closed complex transactions involving healthcare businesses and associated real estate. I also led business development initiatives, driving a strong pipeline of mandates and lasting relationships with private equity firms, strategics, and founders. I’m passionate about helping healthcare leaders unlock and realize the value they’ve built, whether that means a full exit or bringing on a capital partner. Every transaction is unique, and I strive to guide clients with clarity, strategy, and trust.
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As a cybersecurity law attorney with experience handling data breach investigations, and the related ramifications and privacy compliance dimensions, I was pleased when Vertess approached me about publishing a blog article concerning cyber due diligence (Cyber DD). Engaging in due diligence of risk as part of mergers and acquisition (M&A) is a standard practice. So, sharing knowledge around Cyber DD was a sensible suggestion and I readily agreed.
In addition to breach coaching, my experience includes partnering with technology to create legal-tech solutions that help protect assets and businesses. For example, OnCall Recon is a law-led solution that uses patented netflow technology in a two-week audit to verify the effectiveness of security controls. My discussion of OnCall Recon for a Cyber DD use case was the other prompt for this article. The growing risks of cyberattack affect all sectors, so it is timely to inform the M&A community about the expanding risks.
A preliminary observation is whether representations and warranties (Reps & Warranties) is a satisfactory way of avoiding the additional expense of commissioning a Cyber DD service. The risk of a Reps & Warranties approach is whether the parties have a basis for making an appropriate representation about security or assigning responsibility for the risk of a data breach. Threat actors are skilled in establishing a persistent presence, which entails circumventing detection. Moreover, in the cat and mouse game of cybersecurity, the defenders are always playing catch-up with the latest attack technique. Cybercrime will be a $10 trillion black market industry in 2025. The attacks will keep coming.
Yet, in the cybersecurity market, it has usually been compliance mandates rather than cyber risk that has triggered spending increases to improve cyber hygiene. A pending compliance requirement may impact the M&A market – the Cybersecurity Incident Reporting for Critical Infrastructure Act (CIRCIA). In October 2025, a Notice of Proposed Rulemaking will go into effect, having broad implications for cyberattack reporting.
CIRCIA will require reporting to the DHS Cybersecurity and Infrastructure Security Agency (CISA) of any “substantial” cyber incident or ransomware payment by a “covered entity”. The proposed rule has a multi-part definition of a substantial incident, including:
Unauthorized access to a covered entity’s business system:
Caused by automated download of a tampered software update; or
Using compromised credentials from a managed service provider.
Intentional exfiltration of sensitive data in an unauthorized manner for an unauthorized purpose.
Notably, these criteria would trigger CISA reporting for attacks that would not meet the data breach standard under state law. These expansive triggering criteria suggest that third-party or supply chain attacks that compromise an M&A party’s network would trigger reporting to CISA. However, a further step in the analysis is whether the attacked party is a “covered entity”. Except for small businesses, the criteria would also implicate a broad swath of companies in mandatory incident reporting. If the attacked company meets the broad sector definitions of DHS, such as operating its business in the financial services, health care, or information technology sector, it would likely be a covered entity.
An additional wrinkle about CIRCIA’s application to M&A activities is the practice and utilization of a Data Room. The owner or custodian of the Data Room could have a duty to report to CISA if a substantial incident affected it (e.g., a supply chain attack, as noted above), especially because of all the sensitive information contained in a Data Room. Moreover, considering how threat actors seek to migrate and move laterally, the Data Room could be attacked by an upload of data from an M&A party or any of its advisors or partners. Hence, transaction brokers, financial service providers, M&A parties, Data Room Custodians, and any party associated with the M&A activity could suffer a substantial incident giving rise to CISA reporting.
CIRCIA’s final rule may change before it is promulgated in October of 2025. However, the underlying federal law was enacted in 2022 and supports Congress’ intent to improve cybersecurity for critical infrastructure. What is considered critical infrastructure is extremely broad; and therefore, CIRCIA will create an incentive for many companies to improve cybersecurity so that the risk of reporting to CISA is minimized.
For the M&A market, the same incentive applies. Hence, both Data Room cybersecurity and Cyber DD to increase assurance of a clean asset will likely receive higher priority in M&A activities in 2025.
Doug DePeppe
Doug DePeppe is a Special Counsel in the Firm’s Denver office with a national practice in data rights, data protection, sports data and licensing, and cybersecurity law. He is a member of the Firm’s Privacy & Data Security, Sports Industry, and Artificial Intelligence Practice Groups.
A retired Army Judge Advocate and national security attorney, Mr. DePeppe’s military cyberlaw career began with his Army-funded Master of Laws (LLM) degree from The George Washington University Law School with a cyberlaw focus, followed by his leading the Army JAG Corps’ development of a cybersecurity law practice. He next helped develop cybersecurity law capabilities in the cybersecurity divisions at Homeland Security, including serving as the legal advisor to US-CERT.
In his cybersecurity law practice, Mr. DePeppe assists clients in data breach investigations, orchestrating the incident response and crisis management as a Breach Coach. Mr. DePeppe has assisted clients with cyberattack response services for twenty years. He is well known and respected in the field, has presented at major conferences on nearly every continent across the globe, and has published in Forbes, trade journals, and other online magazines.
Mr. DePeppe also assists clients with data privacy prevention and compliance. Leveraging his interdisciplinary knowledge and cybersecurity resource network, he helps clients with risk assessments, leadership and boardroom training and mentoring, third-party contract and supply-chain risk review, cyber due diligence for mergers and acquisitions, and other cyber risk advisory and services.
With his background in data rights, Mr. DePeppe also advises clients concerning name-image-likeness (NIL) protection and licensing. Universities, collectives, athletes, sports entities and associations, and sports agents have growing needs to protect NIL monetization efforts from infringing misappropriations.
While a Judge Advocate, Mr. DePeppe was a trial attorney in courts-martial for five years and became a certified capital case defense counsel. This criminal law experience aids his client advice concerning cybercrime. Additionally, Mr. DePeppe has used his litigation experience in the representation of sport sector mediations and arbitrations. In particular, he has successfully represented several soccer clubs and athletes in administrative disputes arising from the Ted Stephens Amateur Sports Act and SafeSport.
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