Keep Your Valuation High by Keeping Your Risk Factors Low, Key #3: People Risk
Paul continues his series on risk and valuation, explaining how management structure, non-competes, culture, and a clear recruitment strategy lower people risk and support a higher multiple.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good morning and welcome to another episode of Paul Martin's Guide to finishing well. Today we are going to continue on our series of risk. And when we talk about risk, we're talking about driving your risk down so that we can improve your valuation and what you are able to achieve with the sale of your business. Let's jump in. So, as we talk about valuation in the rehabilitation industry comes down to two things. Your EBITDA times a multiple. So if someone has $200,000 of EBITDA times a five multiple purchase price a million dollars.
Pretty simple and straightforward. But as we dive into what really drives this, it gets much more complicated. So what drives a multiple up or down? We get a lot of calls from folks, what are the multiples out there today? And our response is it really all depends upon the risk inherent in the business that's being valued and evaluated. And it all comes down to risk. So risk is what drives multiples higher or multiples lower. Well, what are the risk categories? And as we look at a rehabilitation business, risk is inherent in five major categories.
All of which roll up to the first category that we have covered a few weeks back. But it all rolls up to the earnings risk. Earnings is what the acquirer is purchasing. We have referral payer risk which we have covered. And today we're going to talk about the people risk and how by aligning your people prior to a sale of your company, you're going to get a much higher valuation. So stand by. We also have market risk and we have compliance risk which has become huge.
So let's dive into people risk and how we can decrease the people risk in order to increase our value. So again, how does risk impact valuation? Well, the higher the risk, the lower the multiple. The lower the risk, the higher the multiple. And as we said, it all is driven by your EPID, your earnings. Why? Because acquirers are utilizing OPM, other people's money. They are utilizing the private equity group's money. And the private equity group is borrowing typically from banks and other financial sources. So, they have to pay these people back.
And how do they pay them back? It's the earnings that they acquire from your company and moving forward that pays back the other people. So it's really important on what we're saying is your earnings is what drives truly the risk and your people risk relates directly to your ability to drive earnings. All right. So let's talk about people risk. All right. How do we minimize the risk in your people? Right? Well, first and foremost, it's to have an aligned management structure. Is your management structure aligned for success?
Are your people in the right management titles and overseeing the correct number of clinics or overseeing the correct number of people in order to drive your earnings positively going forward? So what is your management structure? A big mistake that we see a lot of companies make is to go into the industry with their people not truly aligned and thinking that well the acquirers are good at this. They'll align our people. They'll figure it out. They they'll take you know John and put him in the right position.
No. You really need to have a plan for an acquirer on what is going to drive your earnings going forward best. And what do you would you recommend going forward in terms of how to utilize the people you have to continue to drive those earnings going forward? Do you have non-competes on folks where necessary? Now, very few even acquirers are putting non-competes on every single one of your staff physical therapists. But a director who has relationships with multiple physicians, I would tell you that in many cases depending upon the wages that director is being paid, depending upon how important that director is, to have a non-compete on that director that would be assignable, it would be key and imperative to your people story moving forward.
And finally, are there any special deals with people within your company that an acquirer is not going to be willing to continue? And this is, you know, kind of those personal deals that you've made that are typically out of the general line of how we would compensate a therapist or a director for what they're going to do. So, it's outside of those boundaries. Do you have any of those? And can those be fixed before we go to the market? You don't want an acquirer to have to fix those and then have that person leave.
So, what would be the three most important things you should do and can start today in terms of getting that people risk as low as you can and having that be an advantage for your company moving into the market? Well, first and foremost is what is the story that you can tell on your partner alignment. Again, these are people, they have positions, they have titles, but a very succinct story on how you have created this alignment for the future is key and crucial because what they see is without people, this business will not continue to drive those earnings that you're achieving today and going into the future.
Can you define your culture in a very simple two or three sentences to an acquire? And is that a culture that would be defined that could then transition into a new company and continue to drive going forward? So your culture is a big piece of some acquirers and their interest in your company or potentially their lack of interest in your company. And then finally, you know, in today's market that we're we seeing we are seeing companies across the country having a huge problem recruiting professional staff.
And so what we don't want to do is take your business into the market and say, "Well, Mr. Acquire, you just have to fix this because we can't recruit therapists." So I would ask you today to define on a piece of paper and we'd love to help you with this. What's your recruitment strategy? You know, do you have a way of compensating your therapists that may be unique and different and may attract therapists? First and foremost, what is their, you know, what is their what where can they climb in your company?
Okay. What does it look like when they enter your company? Where can they go in terms of a ladder, a career ladder next? Where would they go next? Where do they go next? Do you have today within your company? Do you have a plan or a or a relationship where you can bring interns in? That's a huge way of bringing new therapists into your company. So to be able to define what your recruitment strategy is and then the acquirer will see well you already have a strategy we're just going to add to that to make recruiting even better than it is today.
All right. So, if today you are thinking sometime in the future you may want to transition your company and that's probably why you're watching this episode, but you are not clear on how you should align your people to get the highest multiple that you can get in the industry today. Click below. Let's talk. Thank you and have a great day.
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