Larger, Marquee Deals Are Different. Here's Why
Larry Benz, CEO of Confluent Health, joins Paul to talk about how acquirers approach rehab businesses with 10 or more clinics and what owners of these larger practices look for in a partnership.
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 once again Larry Benz, the CEO of Confluent Health. Confluent Health has been extremely active. They currently have over 30 plus partnerships representing over 500 clinics nationwide, 90 education partners, and in addition 1,500 plus workplace injury prevention sites. Larry, you've been busy. Thank you for coming on. Welcome. Well, I appreciate it. Thank you very much for having me. Paul, just count me again amongst the legions of fans of Paul Martin Associates.
Worked on and off with you for I think almost 30 years if my numbers are close to being correct and so [clears throat] it's just a pleasure to be affiliated with you and your ecosystem of physical therapy operations. So now thank you. I appreciate that. I appreciate that. So Larry, today I really want to dig in with you on some of the very unique differences from we can call them bigs, we can call them larger, but let's call them the marquee company acquisitions. You know, how do you approach an opportunity with a rehab business?
And let's call these marquee, you know, 10 plus clinics. They're unique, right? Well, they're definitely unique. You know, I think oftentimes they sort of fly beneath the radar a little bit. You know, some of these folks are very quiet and humble and they've grown in a very sort of measurable way, sometimes by accident even. I like the term marquee. I hadn't quite heard that before in regards to PT clinics. So, I think that's an absolutely appropriate name for them. You know, I think they're unique because they might be in a rural market, for example.
That might be urban. And we kind of look and try to get an assessment of what are the dynamics that's going on in that market that's enabled them to get to that size. In those marketplaces, do the physician own their own clinics? What are the health systems look like? Are there corporate or private equity backed players that they compete with? You know, I've always believed that private practice you know that they're motivated by success and they can compete and win against anybody, but ultimately you got to look at their size, their cash flow, their margin, and their total their total EBITDA, their total cash flow.
Those are still the lever arms of any business, whether it's one location or 100. And then in terms of the specifics of approaching them, to me, it's really a bilateral due diligence process. We have to get to know each other. How many folks hire their CFO or their marketing person based on one interview or resume? Those are the most unreliable ways to do it. So, you have to get to know each other even more in these unique marquee situations. The relationship is the key. What is their roadmap?
What's their vision? What are their growth plans? I think the biggest thing I kind of look at is what is their runway? You know, if they're at 10 locations or more, how much runway do they continue to have with or without a partner? What does their team look like from a management standpoint? Are they positioned for you know future success and you know all those things go into any acquisition but when you have one that u is a partnership which is the only model we follow and one that is of that size you have to even be more thoughtful in your approach and you know you can sense you know at a PPS conference or I know when you know we've been in any of these large gatherings of PT business owners you know these business owners, they kind of carry themselves just a little different.
And I'm sure that, you know, when they come to a partner like you, they're looking for something that's a little bit different based on that size and success. What do you think these partners are, you know, these marquee company business owners are looking for, maybe different from some of the more locally focused type of companies? Yeah, it's a great question because when they've gotten to that size and scale, they've been around for a while. And more importantly, knowing what they want, they also know what they don't want.
In my experience, they want to continue to grow and they want access to capital. They want scale, sophistication, and systems to make them better, but they also want to be contributors. And that's really key because our partnership model really relies on the interplay or the dynamics between our partner and owners and each other. You know, we have a process we call, you know, you know, better partner, you know, faster fast friends, better partners because our partners need to get each other because they want to contribute to each other.
They're all very smart. But they're also very concerned about the eroding margins. Right now, inflation is a big concern. Staffing is a big concern. And if it's a practice that has started to see margin erosion because reimbursement has kind of stayed stable but their costs have gone up, they want to look to see how you can make them more profitable on the expense side of things. They want to get rid of things like compliance, HR, payroll, legal. They need help with recruitment. They need help with their IT infrastructure, digital marketing, direct to consumer spend, payer contracting is a big one.
In fact, I see the ones with 10 or above that being their main concern is how can you help me get better contracts and what you and what you do get, you know, it's it really is truthful. The larger you get, you have a little leverage because you could bring cost savings to a payer. And that's the first thing, you know, a lot of a lot of these groups want to know is look at my contracts. How are you going to help me get them better?
Because they spend so much time agonizing over poor reimbursement. We all do. And that tends to come to the top of the list, Paul. Yeah. You know, these owners have done something unique and different again from maybe owners of smaller more locally focused companies. What do you think are some of the key ingredients or let's call it the secret sauce for owners who have grown their businesses to this kind of level? Well, the one thing you know for sure is they've overcome a lot of obstacles.
So, they can manage and they can lead. They've created relationships. They've built solid clinical reputation. You can't get to 10 clinics or more without having the basic fundamentals, the blocking and tackling. Correct. They've established relationships. They've done a good clinical outcome and they've been attractive to therapists in kind of an entrepreneurial spirit or in a passion. All these things are not easy to do and at the same time they have incredible resiliency, grit, stick tuitiveness. They have a incredible commitment to the profession and the business and they're they are to us what makes this a wonderful profession and what makes it attractive to have these kind of partnerships because what you want to do is really continue to harvest and facilitate all of those things that have made them great and take away the things that they no longer want to do.
And so it's a wonderful thing really and these are the types of partnerships and types of practices that we absolutely love. Yeah. It seems like, you know, as you described before, it's we want to get to here and we're here right now. You know, do you have some of those ingredients that can help us, you know, get to here? We've also noticed just a very high level of curiosity from these business owners that want to just continue to grow and build and develop. And I think it's, you know, also within that curiosity that they've become so rehab business smart, you know.
Agree. Completely agree. Yeah. I don't think they're any smarter than anybody else in the, you know, I just think that they have, you know, had that curiosity. So these, you know, marquee deals for you guys is are not always easy. No deal's easy, but what are some of the biggest challenges specific to these, you know, kind of marquee deals? It's a it's interesting because oftent times we're all so close to our business, we developed, you know, a familiarity bias around it. And what I find right now is because there's been so many sort of transactions or M&A in the space over the last couple three years that they oftentimes come in hearing of rumors about multiples or about adbacks or takeaways without really examining what that means in their own business.
As you well know, you know, a 10x multiple on one item is not as good as a 5x multiple on other items depending on how they're proforma, depending on what credits they're giving and everything else. So part of the part of the biggest challenge of these things is really eradicating, you know, the bias, the rumors, the beliefs, the perspectives that they may have. So you really have to sort of level set, you know, the terms. What is valuation based on? Well, it's based on cash flow, margin, and growth.
How best positioned are you? How much have you proven out a growth story or a margin story or a total cash story? What are your abilities for same store growth sales? What are your grow what are your abilities for opening up startups? What are your abilities for sort of tuck in acquisitions? And then you get down to the other things. Do they have a legal counsel or a banker or representative like yourself that is experienced in these transactions because it makes communication in the process so much easier and so much, you know, facilitates a much smoother, you know, sort of consiliatory response.
You know, our transactions are bilateral processes because they're all partnerships. These are not oneoff transactions that go away, right? And you know, understanding that this is a service business and that part of the asset being purchased is them. This is a human capital business. Our our partners go home at night, they wear shoes, they take them off, they go to sleep, right? So, they are the assets that you're purchasing. And oftentimes they view their business and themselves separately. But in a service business, you really are one and the same.
That's both to our, you know, credit and to our demise. So, if somebody's thinking they're going to sell a business and walk away, that's fine. They just need to understand they're going to be limited number of buyers and that their valuation isn't nearly going to be as good. So, those are the those are the challenges and the sort of the sticky conversations that you have. Yeah. And it sounds like kind of education on a different side of the business than they already have that they run their business but now going into a process understanding you know how these businesses are valued all those particulars about a deal.
Look you are you are routinely the smartest guy in the room. Geez. And you know one of the smartest guys I know. And but you know these marquee business owners they think they got you know something going on too. H have you ever felt challenged at all by these types of business owners? Oh all the time. All the time. The process you know is really grueling. You know as I like to say you got to challenge assumptions especially your own. And and our approach to these things is a true partnership and not a takeover.
And we won't ever over centralize. And we want change agents. We want to find out what folks are good at and really, you know, continue to facilitate what they're good at and take away things that they're not. I think that some of the bigger challenges in these types of transactions is the, you know, sort of the industry standard in any kind of M&A world is you put this tension around multiple biders and kind of an auction process or a bake off. And one of the things we have to overcome is that our relationship with our partners is built on a consolidation strategy and a rollup strategy that allows them enables them to have much better transactions in terms of valuations going forward than their initial ones.
And that is a very difficult thing to overcome when the only thing they're thinking of is well what is my you know what is my multiple and what is my current valuation. What you also have to look at is what is your valuation going to be in two years, three years, five years. What are opportunities can you create for young partners that are going to really be the succession plan of your practice? Because most folks think that their succession plan is to sell to a buyer when really your succession plan is the legacy that you maintain going forward and how can you best facilitate that with younger partners who you also want to become owners.
And so when you get to all these issues of success in planning around ownership and being really true to your profession and understanding that your valuation today is one thing, but how does that look like going forward in a consolidation strategy? Those are the biggest challenges that we have in large larger plays deals. We've seen so many of them come back to us years later and say, you know, I didn't realize that, you know, when I negotiated this put option in here for me. I didn't realize that if I would have been with a company whose valuation at an enterprise level was getting bigger and bigger and bigger that I was really contributing to that but wasn't getting that I'd have been better off.
So you know it's really an education process and so my encouragement in those situations is again get with a sophisticated representative because they will help you process you know on a proforma basis what your current valuation is the difference in what people are offering you but then more importantly what optionality do you have going forward to really magnify you know that valuation. Yeah, you know, you hear the you know, the nightclub talk or you know, the bar talk at PPS and you know, you still have folks that have this understanding of it.
So, all you can count on is what you get at closing. That's it. What you get at closing don't and in many industries many years ago that was very true. You know, you heard that from a lot of very wellrespected business people. Get we when you look at the history now, if we just go back 10 years of marquee companies that have come in to a company like yours and yours specifically for sure and looked at what they have created for a wealth opportunity, put what they got at closing away.
Now you got another wealth opportunity. And it's very clear and the path is very clear. So yeah, I think that's a hard thing for many business owners both small, medium, and these marquee deals to understand and for these marquee companies. Wow. Just so important. So important. That's right. So what are your expectations for companies the marquee companies once they've partnered with Confluent? You know, it's a great question because we get asked, you know, by these types of prospective partners, you know, what is what is our expectation for growth?
What is your expectation? I've talked to this one company and they expect us to grow 30% a year. And and quite honestly, we just take all of that off the table and we say, here's the reality. U there's no gotcha moments in a partnership. You know, whatever you represented yourself at pre-partnership is likely the behavior you're going to be postpartership. And so, we expect them to perform according to the plan that they've outlined to us, not that we've outlined to them, right? You know, their plan in many ways is their valuation.
Do they have, you know, is there a growth multiple based, you know, based on that valuation? If so, we should expect them to grow. We've actually found it a lot easier to lower our expectations on growth rather than go into a relationship with this pressure that you got to grow at 10 or 20 or 30%. What are you telling us? What's your historical growth pattern? We can help you grow faster if you want. What are our opportunities? And what we really try to do, Paul, is I think the most important thing is together you have to create your own value creation plan around your partnership and how your bigger company, in our case, Confluent, can contribute to that partnership.
And so we expect them to be good partners. We expect them to continue to make an impact with patients. We expect them to, you know, stay with sort of the secret sauce of clinical excellence, customer service, success, compassion, kindness, all those kinds of things and outcomes with their patients. And really having a talent management model around them. You know, we expect if their therapists are 5% of them are board certified, we want two or three or four years that double and triple. We want them to have a lot of fun in the process.
We want them to look at this as a, you know, as something long-term. You know, you mentioned what they, you know, they oftentimes don't see their valuation. They say, "Okay, I'm selling 60 70 80% of my practice." But they don't realize that in a really good model is that their 20 30 40% can actually be worth a lot more than their 60 70 80% that they sold. And what we've been able to demonstrate to many of our partners, and there's something just wonderful about history and data, you know, and evidence, and that is that you've proven a methodology that says your 30% if you do it right will end up being way more worth than your 70% that you sold.
And so, you know, lots of practices, they look at their 401k every month, but they don't look at the valuation of their practice. And we encourage them, we force them once we become partners to really evaluate that. On at least an annual basis if not if not more. And then what we do is give opportunities about every year and a half for them to take additional chips off the table should they want to do that. Because you don't want them sitting around saying, "Oh, when is Larry going to sell or when is this person going to sell?" It doesn't work that way.
It's really about what's best for the business. And in a good business, people will always want to want to acquire cash. So, we just expect them at the end of the day to be good partners, to be collaborative partners, and know that there'll be challenges, but at the end of the day, there's no gotcha moments. We're all going to be good partners. We're going to work through all these things together. You know, it it's amazing the way in which this industry has grown and it's almost like there's now almost this hybrid of private equity.
So many companies get to this size and somebody tells them again at a cocktail party or, you know, you should go for private equity. I've had two clinic companies call me and say, I'm talking to private equity. And I think what you just described, and I think some of the other strategic companies, have the same, you know, model, but you know, you go to private equity, boy, they're going to have growth expectations. And other than money, what are they going to really have to offer to help guide and direct that growth?
So you better be really well established if you want to go that route of private equity. And you better be ready to have Sunday night calls. You know, Tom gives these folks, you know, sometimes a little understanding of what private equity is going to be all about. So Larry, with so many partners, you have to have a story or two about companies, the marquee companies and, you know, kind of their evolution with Confluent. Yeah, I'm happy to. I mean, I think you there's a variety of, you know, sort of benchmarks or metrics you can use.
I think, you know, one of them is the creation of value. The other is the number of clinics, the number of therapists that they have. Without giving some specific geographical, you know, sense to it. You know, we've had companies that have had three or four locations go from, you know, eight or $900,000 in EBITDA up to three million. We've got one company that we partnered with in 2016. That was about 1.7 million multi-site grade operator. They're now over 11 million in EVA. So, think of their partnerships and what value, you know, they they've you know, caught lightning in a jar now four or five times, right?
Or and so they so there's lots and lots of those to go through. You know, the beauty of a really good partnership model is that you add value to each other in multiple ways, both on the revenue side and on the expense side, you know, and at the end of the day, you know, if your goal is growth, you want to get with a partner that can help facilitate the best growth for you in your market. Every market is so different and in some cases it's going to be through you know we we've got you know one company in the southwest that is the same number of locations that they had when we partnered with them in I think 2018 and that doesn't sound like much of a growth story but then you see that their same store sales have averaged about 9% a year and their EBITDA has gone from about you know call it 900,000 to about 2 and a half million well you know I'll take that over having more pins you know more pins in the match or dots in the map.
And so it's really a f a function of having a plan around each specific market. All healthcare is local. And so we have 30ome strategic plans in our company a year because we have 30ome partnerships and you have to approach it that way. And we look at every partner as though it's our only one. You know, we don't try to do a heavy-handed over centralization over decentralization. And it only makes sense to centralize certain things to help you maximize your opportunity cost in the business so you could spend the most time of what you do great at.
And so yeah, we have a ton of great stories around them and have had you know, tremendous amount of success at it. I mean, from the time that we started and just formed Confluent in October of 2014 to where we are at now, we have we have grown over 23x in terms of size of our cash flow. Wow. Wow. Yeah. You know, and again, it's so remarkable how you because I've heard a lot of these stories and how these folks, you know, they just like you said, they kind of catch that lightning in a bottle and you have guided them.
You know, it's almost that hybrid between I always get nervous when an acquirer will say, "We're going to let you alone. We're going to acquire that company you guys are working with, and we're going to let them alone. We're we're just going to let them be." I don't know that's a really good approach or the day this deal closes new signs are going up that makes you nervous too. So again I think Confluent and some and other companies in the market have kind of taken that hybrid approach of the support they need to gain the and accelerate the growth especially for these marquee companies.
Yeah, let me let me react to that for a minute because that's a really good point. So the spectrum is this. So, I'm going to leave you leave you alone and show up at a board meeting a couple times a year or I'm going to come in and put my operators in your company. Okay, those are the extremes. What you want if you're a marquee company is you want that spectrum actually going to about half to more than that. You don't want them in your company operating it, but you better want a level of intrusiveness because it's the only thing that's going to make you better, right?
You know, if you're if you if you were left to stay the same, you shouldn't sell. You shouldn't become a partner with somebody. Exactly. Yeah. No, great point. Great point. So, it sound like you're giving advice there, but what advice kind of general advice would you have for marquee companies that right now they're thinking, you know what, 2022, it may be the year. How do they prepare you know, maybe uniquely and differently from some of the more locally focused companies? Well, you know, there's this whole idea that they test the market and I always get a little nervous when I hear that is there's nothing worse, as you can attest to, Paul, than just, you know, than a busted process.
So, there's just simply too much energy and distraction and money to test it. But I I'll think there's three or four sort of pieces of advice for, you know, let's call these marquee small business owners. And quite honestly, it's not even a specific advice to the physical therapy small business owner. You can you can extrapolate this to any small business. The first one is about is really being very careful to be overly invested in your own business. You should always consider diversifying your own personal portfolio by taking some chips off the table and use them for other personal financial assets while allowing what you roll over or continue to own to magnify through the combined efforts of yourself and a partner.
We're blessed that we're in an industry where you have options to sell. I know many in the medical profession, I mean, look at primary care docs, you know, to say the least, that just don't have the opportunities that private practice do. That's sort of the first thing. The second thing I sort of alluded to, and that is that, you know, I know plenty of PT owners that check their 401k monthly, but they never really check their own opportunities and their own equity and their own practice.
They don't think of it as a dollar sign. And you have to look at, you know, your practice. Is it growing in value? Is it declining in value? And valuations do change. They change in terms of what the market will bear and they turn and they change in terms of what your company is producing cash flow-wise. So you have to look at your practice as an equity because it is if you don't look at it that way and just ignore it, you're literally throwing money away in my opinion.
Yeah. The third thing is there is no best time to sell. And Paul, I know you get into these conversations all the time. You know, there's never going to be a best time to sell. If you have runway for your business and you could do it all on your own, go for it. If that runway or opportunity can best be catalyzed or facilitated by a partner, you should consider it. I will tell you in my entire career of doing transactions over 30 years. I can only think of maybe one practice that after, you know, this is a typical thing they'll say.
They'll say, "Well, I think I'm going to wait another year because I think I can increase it on my own and my valuation will be better." I only know of one practice in 30 years that was able to successfully do that. Most don't because you get caught up in the day in the moment and you're so busy you don't you're sp you're spending so much time in the business you're not working on the business. A good partner will help you work on the business. A really good partner will.
They really will. And be mindful of that opportunity cost. Your churn of what you're focusing on now is so much better taking those stuff that you have to do that is not integral to the value creating process so that allows you to become part of the value creating process of your business. That's really the best time to sell is when that opportunity cost is too high because you're spending too much time in the business and not growing the business. Sure. And I'd say lastly, and you'll get a kick out of this ball as I was thinking about it is don't overly don't be overly concerned with what your college think colleagues think.
You know, don't worry about their thoughts about you selling or partnering or doing what is in your best interest. We have too many stories about colleagues who are reticent because they were so concerned about the overly romantic views of some of their business. It's your business and it's your profess professional asset, but you know what? It's not your kid or your spouse. I know it's like your kid or your spouse, but it really isn't. Okay? And and sometimes partnering will allow you to be a better kid or a spouse or a parent, right?
Most the most of the folks in the profession that you have this belief that they're going to think less of you for partnering or selling are simply jealous. Trust me, your real friends are rooting for you and they'll be happy for you. Don't let anybody lead you astray. Private investment in PT, private equity if you will, is the best thing that's ever happened for the business of physical therapy by a long shot, not even close. And it's given more opportunities for PTs with more options than they've ever had in their entire career or they ever dreamed when they went into physical therapy.
And that's a good thing. Yeah, absolutely. But great points. And yeah, we are all so blessed right now to be in this industry. We have had a long run and we continue to see companies like yours, Larry. Bring folks and have stories of success. Stories of success where there's clinical success and there's also as you said valuation and wealth success. Larry, I appreciate it. This has been, you know, just an invigorating conversation. Love talking about these marquee companies and how you guys have seen these companies in the past.
For any of you out there that have any questions on the conversation that I had with Larry Benz today, click below, give me a call. Larry, thank you. I really appreciate your time. You're welcome. Always enjoy it. Paul, take care.
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