Why This Acquirer Is Evolving Its Culture
Rick Katz of Spine and Sport Physical Therapy joins Paul to walk through how his team evaluates cultural fit, runs its two-phase acquisition process, and is reshaping its culture under new leadership.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon and welcome to another episode of Paul Martin's Crucial Conversations. Today we have with us someone I have known for a long time, Rick Katz. Rick is the vice president and business development at Spine and Sport Physical Therapy. Spine and Sport Physical Therapy is a private equity-backed company based out of one of the most beautiful places on the earth, San Diego, California, and they have grown to 35 plus clinics. Rick is a doctor of physical therapy and also has his mers in exercise physiology. Rick, it is great to have you with us today.
Thanks Paul. Nice to be here. Nice to connect with you again. And thank you all for joining us as well. So Rick, our clients as well as folks that we talk to out there in the industry when a new acquirer and I know you guys aren't brand new, but compared to some of the legacy acquirers, you are a newer acquirer in the industry. And I think that brands you well. But our clients often ask us three specific questions as it relates to new acquirers. And the first one is, and I would ask you this question, Rick, for Spine and Sport, is your strategy for becoming a successful company in the industry different from the strategies that some of the larger legacy companies are following?
I would say yes in the way that the company is being built that it's not solely based upon acquiring IB and acquiring you know just dollars to the bottom line. It's building the foundation of a company. So it's a little more strategic and knowing with my background, the background of our CEO, we come from larger companies that you have to build a strong infrastructure for a company and then build on that and find cultural fits that work within your company. So I would say probably a little bit more strategic than larger companies who are who may just be looking for EVA or Yeah.
And so Rick, the characteristics that you think would make the best fit of a company that again would really thrive by joining Spine and Sport and get down to the basics of what physical therapy is. So it's a it's a patient interaction, patient delivery, customer service type of business. And when you walk into a clinic, there's a certain culture that's there. There's a certain vibe that's within the clinic. And you have to feel that from the first moment of interaction. So it's not really a you know paper transaction as much as it is as a people transaction.
And so the fit is somebody that has a good clinical base with obviously all the requirements of the diversification of referral sources and pair sources and that sort of thing. But it's really to me it's the vibe of the clinic and the culture. And I have since I've been with the company, which is going on almost two years, the acquisitions almost all of them have been people I've known personally. So I already know that cultural that vibe fits even from before I walk in. I've known you.
Sure. Sure. Yeah. And and that people business. But you know all of you need to know that while yes it's peopleto people they are trading some paper when they do acquisitions. Isn't that right Rick? Yeah. Yeah. Yeah. There's the business side is prominent in the transaction. Yeah. Just didn't want anybody gets confused there that you know you're just going to trade people. We'll give you a couple people for a couple. Yeah. No. So let's talk about the nuts and bolts of an acquisition, you know, in terms of structure process that Spine and Sport goes through to make an acquisition.
How would you det define that as being different from kind of the strategies that a larger legacy company may use? Yeah, I look at almost like a two-phase process. The first is, as I mentioned, just seeing how they operate, but I do a higher level review of the operations. I asked for some of the basic information on the metrics of the company the P&Ls going back a couple years staffing payer mix and ju just to kind of get a feel of just from a you know a profitability standpoint is it something that would interest us that have has you has enough substance and upside to it and I'll look through that after we sign an NBA of course and give them my higher trouble you saying, you know, I think that we might be interested in you, but we're not interested right now, and here's a few things you can do.
Maybe consult with Paul Martin to better their business. But, we'll take a look or it looks like it's a fit and if that's the case, then, we'll start looking at what like adbacks might be to the business to bolster what their value is to us in terms of consolidation things. Concept will go away and then we get to a second level process where we have the LOI which is a formal offer that is made after u sport team reviews it and it's reviewed with our equity partner greatpoint partners and the LOI comes out from greatpoint partners and we present that and if we negotiate from that point and then we enter into our more of our deep dive due diligence process which involves compliance review, it involves review of contracts, it involves qual obviously the quality of earnings and we stage that we have questionnaires that really ask for all the details of their business.
Down to the nitty-gritty about the personnel and everything. And we'll have regular weekly calls with the seller and with us to go through where we're at the due diligence process. And then that proceeds to a a one or two day meeting with the with the seller to go through all of the due diligence and ask get into deeper questions and operations and transition. And then you know, proceed towards towards closing. So, it's a multi-level stage process that kind of brings the person along as we go without trying to be overwhelming.
I'll obviously set up the data room and they dump the dump the data and the documents into that for review. And we try to keep things on a timeline timetable. We will actually give them the timetable of what our commitment is to closing the deal. So, that one thing I personally I you know I don't like to is a deal that just springs along and I think our due diligence process is good enough on the front end that we have not come back on the back end and we've cut a deal after due diligence because I I've been involved in those with some of the larger companies that I've worked with and that doesn't sit well for transitioning to the acquisition.
You you don't you don't want to go in with a with an idea that the deal is going to be cut. However, if on the first stages I notice things that may cause an issue, then those are discussed during the due diligence process and people are aware that we may have an issue with either certain contract or something along that line, but we don't we don't have a surprise on the back end of the deal. So, it sounds like, you know, you obviously come with a wealth of experience in this industry, having been through an acquisition yourself, working with larger companies.
Great Point Partners has also played this game before as well. So, while you know what I what I just heard was while yes, you're a new acquirer, the folks that are making the decisions and going through this process with a potential acquisition are not folks that are doing this for the first time. This is you guys have been through this many times. I also noted that it starts with just something very brief, just getting some basic information, having that conversation to see if there's really a fit before you get into a lot of the detail.
And I think a lot of business owners appreciate that. You know, not having, you know, basically, you know, going through and pulling all kinds of information only to come back and say this isn't a fit. Really doesn't make sense. So, good stuff. Good stuff. So, you know, many of the companies that we work with as well as companies out there making these kinds of decisions on who they're going to partner with, culture becomes a real big piece of that. Someone that has been with your company that you acquired, let's say, one or two years ago, how would they describe the culture of Spine and Sport?
I think they describe it as evolving. And actually our company although it's been established for years, we had a new leadership coming in with Brett Rash coming over from Select Medical to Southern California and he and I shared very similar paths and backgrounds. We actually both work for Health South at the same time back in the day and understanding that you have to really establish a strong culture that people can relate to and grasp on to kind of sets the tone for everything moving forward. And in the last year, our company has gone through a real u introspective process of looking to see what is our culture and to develop a culture and value statement.
And we're just actually rolling all that out now as a new you know vision statement, new values and it really relates back to the fact that we really want to empower our employees, empower our patients to achieve their full potential. So we are putting that upfront in our in our discussions with people so they can see really what we're all about. I think you know I think most companies who have a value proposition are very forward thinking what they're doing. It's a matter of how they embody that and carry that out on a daily basis.
That is important thing and that that's something that I believe that we are we we've had all along just haven't hasn't been well defined in the past until right now. It's very important and you know many owners they want to you know protect their people and we often say while yes you want to protect them you also want to show them that there can be opportunities if you were to partner be acquired by a larger business. What would you say to you know the question of what opportunities are there for kind of the rank and file staff physical therapists clinical directors becoming a part of spine and sport?
Yeah, that's a real good question, Paul, because you know, you think about the sellers motivated for their own personal reason depending upon where they're at in their career path, whether they're looking at a an exit strategy or they're looking at a partner that will grow with them. But the even as important as that is what is the motivation and where are the where are the staff people that you have on board and how do you keep them engaged because obviously they're not getting a distribution the proceeds for the most part so they have to be engaged and motivated for other reasons and we recognize this and this is kind of where I think Brad and I have matched up real well and Adam Elbert who's the chairman of our board is that we want to create something internally that gives individuals a path.
And as you know, physical therapists are individuals that are always seeking to better themselves clinically or professionally. They're always looking for knowledge. They're always they always have it's almost inherent in our nature that to some extent you feel like, you know, you're an imposttor in some way or you're not good enough and you're always looking for knowledge to get better. And so we have created pathways and those pathways can go in different directions. They can go into a leadership pathway in which we have a formal leadership development program that all of our clinic directors and people interested in leadership go through that takes them through how to grow as a clinic director manager understand the metrics of a business understand payment understand just you know the basic nuances of running a business.
Alternatively we have we've created a path for CL clinical advancement which involves both internal education that we provide andor advancement through different levels of clinical advancement that have a change in status in terms of their position but also a change or are rewarding in compensation for achieving that because not everybody wants to be a leader and manage a clinic. Some of them just want to just be expert clinicians and develop specialy programs. And then embedded in that we also have a a mentorship program. So that new grads and people that feel like they need to have somebody that can guide them along the pathway, we we've instituted that and assigned mentors and train the mentors.
And then we have a really robust student program like last year we had a co year we had over 110 students that came into our clinics. So there there's a lot of avenues and with that student program obviously we have to support and train clinical instructors and give them that opportunity. So I think by having multiple pathways I recognize both leadership financial advancement and also clinical skill advancement engages the employees of the target the acquisition and we always think you know the clinicians that are part of an acquisition and front office people unless they feel there's something in it for them they tend to question it and maybe doubt the motivations but they understand that there's opportunity that was created through the acquisition then they stay engaged.
Absolutely. Ju just on a side your student program I would imagine has grown significantly since you've been a part of spine and sport. You know you come out of education and it's you know I know it's important to you how do you find that assists in staffing for the future? Do you find that has an impact on staffing? Seems like therapists want to be able to mentor and therapists that have been mentored may want to come join you in the future. How does that back and forth work for spine and sport?
Well, first of all, I'm not going to take any credit for the student program because it was well in place and we've had a had a great program. I think maybe I've added to it a little bit, but yeah, we look at it and you know the environment now recruitment is tough and the competition for labor is pretty fierce in certain markets. And so the student program is a recruitment program. It allows, you know, the ability to interview somebody over the long haul and to decide if you want to make them an offer and get them engaged in your in your clinic and then and then look at where that you might be able to best place them.
And our students don't all just come from California. We have a lot of a lot of students from out of state that want to, you know, look at California. So, it's also introducing them to lifestyle and socially engaging them. And there's a lot more to it than just walking into the clinic and see the patients. So, I think that we do look at it as a as a as a strong recruitment tool and as I said a prolonged interview process that really benefits both parties when you know that somebody's a good fit and retaining that person after their student with an employer that's committed for a while.
Absolutely. Absolutely. And so the start was in Southern California obviously with the San Diego and it looks like you now have you know a big presence in Northern California. How do you guys look at geography strategically now going forward into other states or you know what's kind of the geographical strategy that you guys or the geography strategy I should say for you guys? Yeah, I mean as a smaller company I think and a company that wants to grow and have control and have centralization of operations that you're looking at California right now because of just the similarities and you're dealing with the same payers, you're dealing with the same regulations you see, you know, you kind of kind of know the market dynamics and so California is where I was saying it's right now it's also interesting because historically the larger companies out there the ATI the US physical therapy they have backed off California pretty strongly and you've gone state and other markets so kind of starting up in a market that has more challenges to it I think puts us in a good situation for going into markets that may have different challenges or less challenges from a regulatory and gaining standpoint.
I think long term yes we'll look at and I have looked at practices outside of California. We haven't engaged any anybody yet and we've just really put in our infrastructure for regional management. So again back to the premise that we want to have a very strong infrastructure. We do centralize our building and collections. We do handle our contracting centrally. So going to the state add a little complexity. My personal background as you know is multi-state. My company I was in four different states as far away as an Alaska as Alaska.
So really no issues in terms of remote management if you have the right people. But I think going into other states is a natural strategy and also kind of diversifies your risk a little bit in terms of changes in state laws and regulations. But California right now we're very stable and have a strong presence and we plan to continue to grow here. Yeah. So you're California experts, that's for sure. And to be an expert at Cal in California is not easy. As you said, a lot of regulations, a lot of nuances that people don't realize when they, you know, pop into California.
And when they pop their head up, they realize that they maybe got into a little more than they thought they would be getting into. So Rick, again, an educator. So what advice would you have for someone right now, business owner that's looking to go into this market 2022? What do you think is the most important step for them in preparation for that move? Understanding the metrics and numbers and controlling them. H, having the ability to predict everything from outcome to your net revenue per case, your revenue per visit.
And understanding at what point would be a logical step to expand possibly maybe at you know looking at u the value of your practice is evaluated based upon your EVA and your profitability that you can either do that by internally growing within your same space in same area and explore that potential first and see how you can add efficiencies and control costs first in your own your own clinic and then look at the opportunity beyond that because as you add on multiple locations hopefully your dollar will increase and you become a little more attractive should you choose to pursue an exit strategy with the strategic partner.
That being said though, we've done single clinic acquisitions and single clinic acquisitions can be really strong if you have a good operator that really understands the market. But we do that with the mindset that we want to know where would you go if you decided not to sell and you wanted to expand, what would you do? What would your plan be? So having that strategic thinking behind you as to you know what do I want to do if I did have the ability to do it is important to us because that gives us a foothold or a step forward as to where we would do our denovo or you know our next new clinic based upon the strength of that acquisition.
So controlling your internal operations your numbers understanding your metrics really well and then having some sort of strategic vision of where you want to go. I think those things have to match up to make it make somebody really attractive. So whether you're a single clinic business or a multicl clinic business, having that strategy, seeing into the future of where you can be and really knowing and understanding your numbers seems to be the advice I'm hearing, right? Yes, absolutely. Thank you. So Rick, I cannot tell you how much I appreciate you coming on and sharing some really good information.
I always appreciate talking to you and again, you always come and you bring things that we we've not heard and so it's always a fresh look and I really appreciate your time and the opportunity to talk to you today. Always great connecting with you, Paul. Appreciate it. So, for any of you out there that have a question about the conversation that Rick and I just had, click below. Let's talk. I look forward to talking to you in the very near future. Thank you.
Want to talk about your own business?
Marlton, NJ 08053