The $250,000 Mistake PT Owners Make When They Add Up Their Own Profit
Most PT owners add both owner salaries back and stop there. An acquirer adds them back and then subtracts what it costs to replace those people. Paul Martin walks through that math with Jimmy McKay of PT Pintcast.
Full transcript
Generated from the episode audio and lightly edited for readability.
Many make a small mistake of when somebody tells them at a cocktail party how you find your EBITDA, it's not really that. It's taking all of their salaries, you got two owners, you put all that to the bottom line, and they're- Yep ... each taking 250,000 a year, and they forget that you have to replace that with a replacement salary.
Today's guest has seen more PT practice sales than anyone alive, I'm just making that statement, and somehow still answers the phone himself when on a call. He's a physical therapist who grew three clinics into 21, founded Martin Healthcare Advisors, and spends his days helping PT owners turn, "I think I'm ready to sell," into, "I actually know what this company is worth."
And there's a big difference there. He says most owners treat selling their practice like selling a house. You put it on the market, wait for buyers, you pick the best offer. Done. Walk away, throw 'em the keys. But that's not how this works, not exactly. Buyers are not buying your past, they're buying your future.
They're buying earnings, growth, leadership, systems, reduced risk, and the belief that the business still works after you walk away. So today, we're asking, what actually makes a PT practice valuable? What kills a deal? Why should owners start preparing two or three years before they sell? Yeah, two to three years at least.
And how do you know if you own a business or just a very expensive job with a logo? So let's bring him in. Welcome to PT Pintcast, Paul Martin. Paul, welcome to the program, man.
Yeah, thank you, Jimmy. Great to be here.
You probably deal with a lot of people in situations where you're gonna ask questions that maybe they knew they should be asked...
It's like, kinda when you're like, "Did you do the homework?" You're like, "I knew I should have, but I didn't." Then they get to you, and you're like, "I'm not letting you skate past that." So you said selling your practice is not an event, it's a process. So what happens when a PT owner treats it like an event and not like a process?
Yeah, I think when a PT owner treats the sale of their business like an event, not a process they miss out on gaining the true value of their business. They miss out on the opportunity to run a process whereby you put many acquirers, buyers on the same starting line at the same time.
You drop that checkered flag. They all have the same information, and then they are all vying to buy your particular business. Versus you get a phone call and, "Wow, this company seems really interested in me. In fact, I think they love me." "They've never said more nice things to me." "I, this is this is my company.
This is the one I wanna sell to." And going down that road can be a disaster because you've just given away the steering wheel. You want control of the process. You don't want the acquirer to have control of the process. And when you do that and when you treat it as such you give away that steering wheel.
Running a true professional process, we think is so important. And we even think to the level of, the way large investment banking companies run a process, it is disciplined. It is, accurate. It's providing high-level materials for the potential acquirers. We bring that, and we believe that should be offered and available to physical therapy businesses of all sizes.
Let's start with the misconception. I always like to start with these because it's probably the most people, right? When a PT owner calls you and says, "Listen, I think I'm ready to sell," what do they usually misunderstand about the process that you didn't already sorta clear up? What, what do they think buyers really care about versus what they actually are looking at- Sure
and gonna dive into?
Sure. Yeah. And many times they think that it's about the practice and it's about historically what the practice has been able to do and the community ties that you have and all the different types of therapies that are being done in the practice. Those are all really important things until we come to the question of what is your EBITDA, your cash flow?
What, how much money are you putting to your bottom line after you pay yourself a salary, et cetera, et cetera? Because the hard and cold truth is they are buying that cash flow, and without that cash flow, it's really hard to sell any business, let alone a physical therapy business. So I think that's something that many owners don't, truly get.
Sure.
And it's a rude awakening when then they send their information and the acquirer comes back and says there's no cash flow, so we're not interested," or whatever it may be.
You said buyers are not paying for what an owner built, the past. They're paying for what the company will do or they hope will do in the future.
Explain that like I'm a clinic owner who's never sold a business- Sure ...
before. Sure. So an acquirer is not going to pay you for what you're going to generate in the future, but they are buying your future. So they are going to pay you based on your historical performance, and typically that's the very most recent trailing 12 months.
But many owners stop there. "Okay, this is what they're, they're- they're buying. I'm gonna, maybe stay on a year or two if that, but I want to get out." What a buyer is looking for is, are you building your business to a transaction? event, or are you building it through that transaction and that event?
Oh, okay.
So what we try to do is talk about the future and put in a very some detail, but very clear is where is this business going in the future to grow through that transaction? It's kinda there's a train and it's gonna make a stop, but soon as you get on, it's taking off.
And so you better jump on quick because this train is going, and it's gonna continue to grow. That's how you attract more acquirers, is to show your future 'cause the past is something that they expect you're gonna be able to show them.
Sure. You've said some owners spend more time really, like, preparing their car more for a trade-in, less for a sale.
What should they be detailing if they're, in their business if we're going on that car analogy?
Yeah. That wasn't a nice thing for me to say, Jimmy. It's just-
but it's true, right? That's, that's, but I also like putting it in those terms because maybe we weren't taught to these things.
That's why you, that's why you have a company. Good point.
Very good point. No, we were not taught this, and physical therapy school did not prepare us for the business side of our business. And I think even today it does not prepare physical therapists for the business part of their job. And no, I think physical therapists when they look at, preparing to sell a business there's many steps to that, from making sure that their financials are in order, making sure that their operations are driving those financial results, making sure they can show how's the retention over the last three to five years?
So knowing those things about your business and being able to talk about them like you talk about what you had for dinner last night, and all the how you put that together and all the ingredients. You really need to know every aspect of your business- We try to teach business owners that because inherently they don't know that.
They're tied up every single day. There's the next problem, there's the next therapist that happened to leave. There's the next one that either is, going on vacation or just got pregnant or whatever it may be. And so there's these constant... So to really truly know the things that an acquirer wants to know about their business sometimes is a process.
Yeah. You've said the best time when I should prepare is two to three years before you wanna sell. Why that far out? What does that give you in terms of flexibility or preparation time? What does that arm you with?
Sure. First of all, your financials have to be in order, and many times financials are not ready for a quality of earnings review.
Jimmy, have you ever had a living autopsy? I have not. Not personally, no. It does not sound fun. That's how I would describe- yeah ... a quality of earnings review. It's an audit that's being done by the acquirer on your books, and they're gonna shred them. They're gonna go into every single line item, every single detail.
So it takes some time to get those prepared, and not all CPAs and accountants know how to prepare those for an acquirer. Another big piece is, as you're looking at your operations performance, where are your KPIs in comparison to your competitors? Where is your productivity? Where is your retention rate, patient retention, visits per FTE per day, visits per new patient?
Where do all those metrics fit if you are because remember, acquirers are comparing them to the last really good business that they acquired. So they really wanna see... so that's another preparation piece. Big piece that I think a lot of multi-clinic owners may miss is truly aligning the leadership group.
When your leaders... And think of, you as the CEO and then you have, let's call it 20 clinics, and they all have clinical directors. The, the leadership are all those people in the middle of that. It's your director of marketing, it's your director of administration, it's your chief operating officer.
All and they're managing multiple things each and every day. They have to have real standards passed down to them that they have to show they are meeting because remember, many of them are not treating patients. And then as you get closer to an event, an acquirer looks and says, "Wow, those six to eight people, they are important."
Okay, are they under non-competes? Do we have a strategy that if we're gonna roll equity forward into a new company, me as the owner, is there a way that we can do that with this leadership group as well so that we are aligned in the future? Yeah. Acquirers wanna see alignment, and if you can go to the acquirer, we already have a program that exists that all of our leaders will have a value at the time of a transaction, and they can roll that value into equity in the new company owned by the acquirer and you.
Now you have a team that's gonna drive, you to that second level- Yeah ... of growth, which I described before growing through. That leadership alignment proves that out and really proves that theory.
Knowing these processes that you're talking about could easily change the value of a sale of a company either way, right?
You could double or triple the value of a company before it goes to market if you know what levers to pull and what things to do. So Paul, million, billion-dollar question, what are the levers to pull? Yeah. What are the things that people should be doing- Yeah ... to make sure that they're getting the most out of it?
Absolutely. That's the secret sauce, so I'm not gonna tell you that answer.
All right. Good. Yeah. We'll bleep this part out.
No. One of the biggest areas that we find is in charge capture. That is, what units are your therapists billing for the procedures that they are doing? And in many cases, therapists will choose to bill a code that is a lower paying code than they will choose to bill the right code.
And so that is one of the biggest areas, and when you go about it with you're providing the care, we are the most underserved- asset in healthcare in terms of what we generate for for patients. The results that we get in patients, we are severely underpaid for the results that we achieve with patients.
So if you're doing therapeutic activity, we want you to bill for therapeutic activity, even though it's more expensive than therapeutic exercise. Neuromuscular re-ed, and, that's another more, higher level code. That's what skilled therapists are doing with patients. Most skilled therapists are not doing three therapeutic exercises.
It's putting somebody on a bike. They can do that at the gym. And my point is that most therapists are already doing that. They're just not billing for it, and they don't think it's right, and they feel conflicted, and we understand, and maybe their training has been that way. That's one big piece.
Another big piece is schedule management, and this has two, two, two, two, two levers, okay? The first lever is we have to make sure we are scheduling as such so that we are maximizing productivity. We're big believers in PT assistant teams. We feel, find that works, especially if the PTs are at a level that they can truly manage the care of their patient while the PT assistant is carrying out some of that care.
We've designed the plan. Me as the PT, I've done the evaluation, et cetera, and we're checking in every every so often but making that schedule in a way to maximize productivity and the communication between therapists and front desk has to be what we call completely patient-centered. We will do whatever we can to get the patient in and to do what the patient needs from us to get them better.
Many times that's not happening in clinics. I gotta be out of here at 4:00 today 'cause that's when my whistle goes off that I have to leave. And so there's way of incentivizing to to help therapists and front desk be able to do that better. So the one side of it is getting as many patients scheduled as we possibly can in the most productive manner.
The second side of that, which this is, where the other side of the sword comes in, is you have to do that in a compliant manner. It has to be within compliant standards, and while we can sometimes shift into the yellow a little bit, we're in green, we just touch that yellow, you don't ever wanna go deep into that yellow into the red because acquirers will pick that up immediately.
Sure.
And most acquirers will flag that and decrease your purchase price. There are some a little bit more aggressive out there that are not quite as bothered by that. We don't want our clients... we want our clients to, to to be right in that green.
So that is a very difficult process to get full productivity while you're also maintaining full compliance.
Yep.
That's the other area that we really find. I think, the, the third area is attracting and retaining not just staff, but we talked about this with Curt Cignetti. He wants pressure-tested players, and so if you don't pressure-test them in practice so they do the loud music and all that.
He was the coach of Indiana Hoosiers who won the national championship. Anyway, we have to pressure-test our therapists, and our therapists will appreciate it they don't wanna be babied. They, they really don't. We think we sometimes have to baby them because, oh, they like their free time and they like their balance, and they do all that.
But they also want to know when they're performing well and when they're not performing well. And if we don't pressure test them when we have pressure situations, they're gonna wilt and they're gonna wanna go home. So I think those are three areas that we find are very key. You got stronger, more willing physical therapists, they're billing the right codes, and schedule management is at 100% communication between front desk and therapists.
Those are big areas.
You alluded to this before, but how damaging is it when the owner is still the ringmaster, the center of everything? They are the star clinician, they're the referral magnet, they're the problem solver. How damaging is that in terms of the situation when you find these, these people?
Yeah.
Yeah. It's more in small practices than it is in large practices. Sure. And there's a reason why large practices get higher multiples than small practices. So if I can be a small practice but I can make my practice appear more like a large practice, I am gonna get a higher multiple, and by doing that, you are essentially you would be willing to take the 30-day test, which is, "Hey, guys, I hate to tell you this, but I'm leaving tomorrow, and tomorrow's a Friday.
I'm leaving tomorrow. I'm gonna be gone for a month, and you guys aren't gonna be able to contact me. So you know what to do."
Yep.
Do they? Do they know what to do? And that is passing down, again, those policies and procedures and how we run our practice and making sure that you have those leaders in place that can run your practice when you're gone.
Acquirers are very skeptical when owners wanna leave very quick, very quickly after a sale. And so that's why I say, think out probably more like seven to, five to seven years before you wanna be done, meaning I wanna be out of my clinic, traveling, doing something else, to start preparing, because you at least a minimum of three years with an acquirer is where you're gonna get the best deal.
Yeah. You're gonna get the highest multiple, the best deal. And where if you have rollover equity, you can maximize that utilizing the resources of the acquirer and gaining that second bite of the apple, as they call it.
I like when people change their minds, Paul, 'cause it's always unique how they got there.
You used to say and question how many PTs were actually really true entrepreneurs, and you've changed your mind. What did it change to and why'd it change?
Absolutely. Way, way back when, I sold my practice and we grew it to 21 clinics and, I was a young entrepreneur and, I was different than all the other physical therapy-owned businesses out there because they're just physical therapists.
No. As I started becoming involved with physical therapists and their businesses, how quickly they were able to embrace systems and processes to run and manage their business. I cannot tell you how many businesses we started with one single site. We have one in New York two partners, one, one single site.
I can remember I went to visit them. Their eyes were this wide open when I told them about how we grew our business, and they today have 54 clinics in the New York metropolitan area, are backed by private equity. So yeah, the, physical therapists have great acumen, and when you think about it, when I go to do a, an evaluation of a, a human, a patient I'm looking at all the things that are keeping that human, that patient, from being able to do the things that they want to be able to do.
I can look at a business the very same way. And I find that physical therapists are very strategic when they look at their businesses. Sometimes they just don't know what are the systems and processes that I now can use to build this to 3, 10, 15, 20? And when they can see that, when they can see that in a map, literally how that is done, we're gonna do two startups and one acquisition per year over the next five years.
Here's the criteria. When they can see that in a plan, the lights go on. And it's like you're a young guy. You're a lot younger than I am. You probably don't even remember UHF TV.
Oh, yeah. Ultra high frequency. Yeah, I remember. Weird Al had that movie, or VHF.
Yeah.
VHF. Remember you could barely see it, but there was- Yeah, all squiggly ... people back behind there, and then now we have high def. I always describe no plan to a clear plan is going from UHF to high def. Yeah. When I'm driving to California to visit my son and daughter-in-law and I'm in New Jersey, how do I get there?
I need the plan. Okay. Plans are very important, and that's what I think spikes physical therapists to now become entrepreneurs and business owners.
You just mentioned it a second ago, your story. You grew from 3 clinics to 21, which is not a small feat, but let me ask you this. What did the 21-clinic version of Paul understand that maybe the 3 clinic version of Paul maybe didn't?
Or, what'd you learn between 3 and 21?
Yeah. No, how to execute on a plan and how to take three owners ... And we had a consultant by the name of Alan Cox and Associates. He spent with us for three years from 1993 to 1996. He came on site from Florida a week a month. For three years.
And I lived in his pocket just learning exactly how. And we developed a plan, we executed on that plan, and that was where I really learned and where the lights went off, which we had three clinics, three owners, and we were just stuck. We, we- ... and I said, "My goal is to have 20 clinics someday."
And my partners would look at me and say who's gonna run the clinic that you're running?" I don't know. I don't know exactly how that works." And and I'll never forget in our house with the three partners, and Alan got up, he had the whiteboard. I love whiteboard. I loved whiteboards.
He's got the whiteboard going, and he puts up my clinic, and he said, "Paul is gonna be replaced by Nancy on Monday." Wow. "She is the new director of the Moorestown clinic. Monday, he's going to vacate that clinic, and she's gonna-" Wow ... "become the new director." And I could see my partners, like they they were shaking.
They're, who are you to... But what about us? Wait, what about us? What a-" Jeff,
all right. We all hopefully have an Alan in our life, somebody who sees something and puts also a process to it. What do you think helped you think bigger with that time with Alan, right? He walked in one day and said, "Hey, listen, Paul's out. Somebody else is assuming his role on Monday morning."
After that, full body sweat wore off, what were the things that helped you think bigger after that from three to eventually 21?
Sure. Yeah, if you can see it, you can do it, if I think, again it went right back to the plan, and a plan that included how much money are we gonna have to borrow what's each one of these new startups gonna look like, what does an acquisition look like?
And we're actually bringing a full criteria into each acquisition, so we'll be able to very quickly say, "Nope, this one doesn't fit our criteria so we don't need to spend any more time on it." So there was a real process that was set in front of us, and I always knew that in order to grow, we could not keep treating patients and running clinics.
And so it was just music to my ears when he said I was gonna be out of my clinic in a month. Jeff was gonna be the director of work hardening, and because we had a big work hardening workers' compensation program. He was gonna be out of his clinic in a month, and then within three months, Jamie was gonna be our director of marketing, and she was gonna be marketing.
And we never had the trust in our staff to be able to run the clinics. We thought we were the only ones that could run clinics until we saw that there was a job description for a clinic director. There was training that we were gonna do for the clinic director. We weren't just gonna put them in and close our eyes.
And when all those processes took place with the three clinics that we had, it was just copy/paste, copy/paste, copy/paste, copy/paste once we went to four, five, six. And late in 1996, we did a seven-clinic acquisition in Lancaster. Wow.
And that really took us from 14 to 21, and that was when we knew we were ready to start looking for a partner.
All right, I'm gonna force you. You have to pick one of these firsts. Okay. So I'll set the stage. A PT owner has decided this month they wanna sell in three to five years. So you got them on that good, that timeline, right? Okay. They're doing things ahead of time. Yep. Give me their first phone call, what's their first spreadsheet they need to create, and what's the first uncomfortable truth they need to face?
Yeah. So the first spreadsheet they need to create really is a spreadsheet that would show them couple things. One is what are their metrics compared to the industry standards, where are their metrics? Visits per FTE per day, visits per new patient, units per visit. Where do they stand in the current market?
Who do they need to call? Jimmy, give them my number. What you really need to have, though, seriously, is what you need to have is an evaluation. Just like a physical therapist evaluation. And in this valuation, we would call it an assessment, where you're assessing the business's readiness for a transaction, and that's everything from financial to operations to clinical to leadership to growth plan, et cetera, et cetera.
All they... are you really truly ready for? And I think that is the first call that they would make. What was the last one?
The first uncomfortable truth they need to come to and face.
Yeah. First uncomfortable truth that they will have to face is in many cases where their perceived value was and their actual value.
Many owners make a small mistake of when somebody tells them at a cocktail party how you find your EBITDA, it's not really that. It's taking all of their salaries, you got two owners, you put all that to the bottom line, and they're- Yep ... each taking 250,000 a year, and they forget that you have to replace that with a replacement salary.
So that seems to be, tends to be the biggest truth that is what that true value of the business is and how far or how close they may be to where they are willing to, "That's enough for me. If we can get X at closing, Y, down the road in a couple years that's enough, and we're content- Yeah
and we can move that." Or, "We're not even close. We have so much work to do to get to a point where we're even willing to consider." So they've talked about selling the business for three months, but once you have the valuation done and the assessment done, you're years away from getting the value of what you really need to get in order to make that decision.
All right. Let's let's go out of this and go big picture. I want you to help me read the tea leaves. Are you bullish, bearish on the profession as a whole? You talk to owners, under the hood of a lot of people. I'm not gonna ask for any, information I shouldn't have, but overall, when this comes to your brain, are you optimistic on the profession?
Where do you sit?
Yeah. I am extremely optimistic on the profession for probably two main reasons. Number one is there is so much need, and we don't have, there is so much need for physical therapy. There are way more patients that need care that are not getting care, and that are on waiting lists across the country to get care.
So we have an enormous need for our services. I think the other reason why I'm very bullish on this is that- at some point in time, as we continue to show the value that we are providing to patients, and we are, continuing to march to Washington- Yeah ... to show the value that we are providing to patients, we are the absolute greatest value in healthcare, without a doubt.
And I think the more of that we can push and press the more our reimbursement will start to get to a point where being a physical therapist is a good career versus currently, it has its challenges.
Sure.
A therapist coming out of school in 10 years they may be only making 10 or 20% more than they made when they were out of school, unless they start their own practice.
Yeah.
And there's many, get rich quick opportunities out there with AI and other things in business, so many college students are choosing not to go into physical therapy. So I think- Paul Martin- ... that's gonna be a challenge.
Paulmartinhealthcareadvisors.com is the website.
That's where you'd send people. You've got your own YouTube channel there, LinkedIn. I see you sharing insights like we talked about today, and others on LinkedIn as well. But Paul, we have a tradition on the show, it is called The Parting Shot.
This is The Parting Shot. One last mic drop moment. No pressure, just your legacy on the line.
All right, no pressure.
I'll set this up for you. A PT owner's listening right now, they're five years, three years, even one year away from selling. What do they need to hear from Paul? Is it a pep talk? Is it a get your stuff together? What's the pep talk you give to someone if they're a few years out? What do you say to them?
If you are a few years out, you need to start today at getting a true understanding of what your value is, not by a third party appraisal company, and what's your value in this current market?
And if that value, after I pay taxes and after I get the second bite and all that where is that compared to what you will need in order to move into the next part of your life? And start building today the plan to get from point A to point Z. Once you can see it, you will believe it, and once you can execute on the first part of it, it's just get to the next step of the plan.
Yeah.
That's what I would say for all to embrace that because you will get to a finish line if you start that process today. Don't wait.
Paul Martin, appreciate the time. Thanks for coming on the show and setting everybody straight.
Thank you, Jimmy.
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