Letter of Intent Template for Behavioral Health Residential Acquisitions

Parties and Facility Identification

Identifies the buyer, seller, and the specific licensed facility or facilities covered by the LOI, including the legal entity name, state license number, bed capacity, program type, and physical address. In behavioral health residential deals, it is critical to identify whether the transaction covers a single licensed entity or multiple programs under a parent organization, as each licensed program may have separate transferability requirements.

💡 Sellers should ensure the LOI references the specific license numbers and accreditation certificates that will be subject to transfer review, not just the operating company name. Buyers should clarify upfront whether they are acquiring the licensed entity via stock purchase or acquiring assets and applying for a new license, as this distinction materially affects timeline, deal structure, and payer contract continuity. Confirm whether any affiliated sober living, outpatient, or PHP programs are included or excluded from scope.

Purchase Price and Valuation Basis

States the proposed total consideration, the valuation methodology used to arrive at it, and how EBITDA was calculated including owner add-backs. Behavioral health residential facilities in the lower middle market typically trade at 4x–7x adjusted EBITDA, with premium multiples awarded to facilities with CARF or Joint Commission accreditation, occupancy above 75%, diversified payer mix, and documented clinical outcomes. The LOI should specify the trailing twelve-month period used for EBITDA calculation.

💡 Buyers should resist locking in a fixed multiple before completing payer mix analysis — a facility with 60% Medicaid fee-for-service revenue warrants a materially lower multiple than one with 60% commercial insurance. Sellers should push to define which add-backs are pre-agreed to avoid post-LOI disputes. Both parties should agree on whether working capital, accounts receivable, and prepaid program fees are included in or excluded from the purchase price, as AR aging in behavioral health can be complex due to insurance adjudication timelines.

Deal Structure: Asset Purchase vs. Stock Purchase

Specifies whether the transaction will proceed as an asset purchase or a stock purchase, which is one of the most consequential decisions in any behavioral health residential acquisition. A stock purchase preserves existing state licenses and payer contracts in place but transfers all historical liabilities including any undiscovered billing errors, regulatory citations, or prior incidents. An asset purchase protects the buyer from legacy liabilities but requires re-licensure in most states and re-credentialing with all payers, which can take 60–180 days and create census disruption.

💡 Buyers considering a stock purchase must insist on a thorough regulatory history review including any state inspection reports, corrective action plans, and incident reports for at least the prior three years. Sellers who have maintained clean licensing and billing records should advocate for a stock purchase structure as it typically commands a higher price and cleaner close. If the state requires a change-of-ownership application regardless of structure, confirm the estimated timeline with the state licensing agency before signing the LOI to avoid closing delays.

Earnout and Seller Carry Provisions

Defines any deferred or contingent consideration tied to post-closing operational performance, which is common in behavioral health residential deals due to the risk that census, referral volume, or payer contracts may shift during transition. Seller carry of 10–20% is typical and may be structured as a promissory note or an earnout tied to occupancy rates, revenue retention, or successful license transfer. The LOI should specify the earnout metric, measurement period, and payment schedule.

💡 Sellers should negotiate for earnout metrics they directly control — such as maintaining referral relationships or supporting the admissions team during a defined transition period — rather than metrics influenced by buyer operational decisions made post-closing. Buyers should include provisions requiring seller cooperation during the earnout period, including introductions to referral sources, support during re-credentialing, and reasonable availability to clinical staff. Both parties should define how earnout calculations handle insurance denials and AR timing, which can create apparent revenue shortfalls unrelated to operational performance.

Transition, Staffing, and Key Person Commitments

Addresses the seller's post-closing role, the retention of key clinical staff, and the transition support obligations that protect census stability and referral continuity. In founder-led behavioral health facilities, the clinical director or founder is often the primary relationship holder with hospitals, courts, and insurance case managers, making their post-closing availability a material deal term. The LOI should specify the length and terms of any transition consulting or employment agreement.

💡 Buyers should assess whether the earnout structure creates appropriate incentive for the seller to remain engaged during the transition period. If the founder is also the licensed clinical director, buyers must confirm whether a replacement clinical director has been identified or whether a qualified interim clinical director will be in place at closing to satisfy state staffing ratio requirements. Sellers should negotiate transition consulting compensation separately from the seller note to ensure clarity on what is consideration for the business and what is compensation for services rendered.

Due Diligence Scope, Access, and Timeline

Defines the scope of buyer's due diligence investigation, the information and access the seller will provide, and the timeline within which due diligence must be completed. Behavioral health residential due diligence is more complex than most lower middle market deals due to the need to review state licensure files, accreditation survey reports, payer contracts, credentialing files, billing records, incident reports, and clinical staffing documentation. A 60–90 day due diligence period is standard for facilities of this type.

💡 Sellers should prepare a due diligence data room in advance that organizes these materials to avoid delays and signal operational sophistication to buyers. Buyers should engage a healthcare-specialized due diligence advisor or attorney to review licensure and billing records, as generic M&A counsel may miss material issues specific to behavioral health regulation. Both parties should agree upfront on confidentiality protocols for client records, which are protected under HIPAA and 42 CFR Part 2 and cannot be disclosed to buyers as part of standard due diligence without appropriate safeguards.

Exclusivity and No-Shop Provision

Grants the buyer a period of exclusive negotiation during which the seller agrees not to solicit, entertain, or accept competing offers. Exclusivity is standard in lower middle market M&A LOIs and protects the buyer's investment of time and resources in due diligence. In behavioral health residential deals, exclusivity periods of 60–90 days are typical given the extended due diligence required for regulatory and licensure review.

💡 Sellers who have not yet engaged a formal marketing process should ensure the exclusivity period is long enough to allow a good-faith closing effort but not so long that it forecloses other options if the deal stalls. Buyers should use the exclusivity period productively by completing substantially all due diligence and delivering a draft purchase agreement before exclusivity expires. If the LOI includes extension provisions, tie extensions to specific buyer milestones such as delivery of financing commitment letters or completion of regulatory due diligence.

Conditions to Closing

Lists the specific conditions that must be satisfied before the transaction can close, which in behavioral health residential acquisitions typically include regulatory approvals, payer contract transfers, financing, accreditation confirmation, and key staff retention. Unlike most lower middle market businesses, behavioral health facilities face a mandatory regulatory approval process that is outside both parties' direct control and can materially extend the closing timeline.

💡 Buyers should research the state's change-of-ownership application process and typical approval timelines before signing the LOI and build that timeline into the expected closing date. Sellers should push to define 'material adverse change' with specificity to avoid a buyer walking on a technicality — for example, agreeing that a temporary census dip of less than 10% below trailing average does not constitute a material adverse change. Both parties should discuss what happens to the deposit or exclusivity if a state regulatory approval is delayed beyond the anticipated closing date through no fault of either party.

Confidentiality and HIPAA Compliance

Establishes mutual confidentiality obligations covering all shared business information and specifically addresses the restrictions on sharing protected health information under HIPAA and 42 CFR Part 2, which governs substance use disorder treatment records and imposes stricter confidentiality requirements than general HIPAA. This section is uniquely important in behavioral health residential deals and should be addressed explicitly in the LOI rather than deferred to the definitive agreement.

💡 Buyers should engage a healthcare compliance attorney to review any data sharing protocols before beginning due diligence to avoid inadvertent HIPAA violations. Sellers should confirm with their privacy officer which categories of information can be shared in aggregated or de-identified form versus what requires a Business Associate Agreement. Note that 42 CFR Part 2 imposes consent requirements that go beyond HIPAA for substance use disorder records — even aggregated data may require special handling depending on how it is generated.

Governing Law and Binding Effect

Specifies which state's law governs the LOI, clarifies which provisions are legally binding (typically confidentiality, exclusivity, and governing law) and which are non-binding expressions of intent (typically purchase price and deal structure), and sets forth the parties' agreement to negotiate in good faith toward a definitive purchase agreement.

💡 Sellers should confirm that the non-binding nature of price and structure provisions is clearly stated to preserve flexibility if due diligence reveals undisclosed issues. Buyers should ensure that confidentiality and exclusivity are explicitly carved out as binding to protect their due diligence investment. Both parties should agree on a process for addressing material due diligence findings — for example, a defined re-negotiation window rather than an automatic right to walk — to encourage good-faith resolution of issues that arise during the diligence process.