The Enormous Impact That Private Equity Has on Your Deal #1: Definition
Paul opens a series on private equity by defining what it is, how PE firms sponsor strategic acquirers, and why fund size and round of financing matter to PT business owners considering a partnership.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon and welcome to another episode of the Martin Rehab M&A advisory. Today we're going to kick off a series that is going to explore what impact private equity has on the biggest deal of your life. And so what we're going to do today is first and foremost is talk to you a little bit about what we're calling private equity defined. What is private equity? How does it impact the companies out there that you're looking to potentially partner with? And we're going to define exactly what that is.
And then we're going to go through this series and really identify how private equity can impact your next big deal. All right, let's jump in. So again, if we look to define private equity, all right, what is private equity? Private equity are funds. Funds is a pile of money and the funds are built and made by investors. Investors have put money into these private equity funds and then these private equity funds invest either directly in companies or they buy owners out of their companies. And what we're most commonly seeing in the outpatient rehabilitation industry is that these private equity investors funds are investing in companies and then driving their growth in order to get then a return for the money and the investors who put the money into these funds.
Now, most typically in the in the physical therapy world, private equity is going to invest or we can call it acquire. They buy a majority interest in most cases. But typically with multic clinic companies that have over 2 million of EBITDA, that's typically companies that are 10 million or more in revenues. And these are growth companies that the management team that is in place they can see that these companies are going to be able to continue to grow. And in most cases, the large majority of the management team is going to stay in place and continue to drive forward.
But in some cases, private equity groups may or may not bring in their own management teams to drive growth in these companies. Currently in today's market, we have 23 private equity firms that have invested in large physical therapy companies. Let's call them strategic acquirers. Strategic meaning it's the same kind of company as yours. They're just much bigger. So, how does this impact you as a seller or as someone trying to find a partner in the industry to move forward with? Well, look, in most cases where P private equity kind of fits is private equity you when you sell your business to a company that's out there, that is the strategic acquire.
That is sponsored by a private equity firm. Sponsored is just another word for the private equity firm has invested in the strategic company that essentially is acquiring your company. Again, unless you're a large company with over $2 million of EBITDA, typically you're not going to be acquired directly by a private equity group. It's going to be a private equity group has sponsored a strategic acquirer that then is going to acquire your business. And it's really important that you're clear on that because the private equity group is somewhat behind that strategic physical therapy company.
They're not the front of that company. They're behind they're the investors. They're the ones that are financing the growth. They're the ones that are looking to create strategy to help the company grow, but they're not the face of these companies that you would be acquired or that you would partner with. Now, but private equity groups do have an impact on the company, the strategic acquirer that you may be talking to or that you may have an interest in. Private equity firms have a personality and some of those personalities out there from these private equity groups may match what you're looking for and some that don't.
And I think most notably the way in which we see you know the different personalities of these private equity groups is the size of their funds. And typically that is spoken of as assets under management. And in this current industry, we have physical therapy companies backed by funds that have assets under management of $2 and a half billion dollars. Sounds big until you look at some other strategically strategic physical therapy companies that are backed by private equity groups that have 50 billion or more of assets under management.
And many of these strategic acquirers, physical therapy companies are going to go through es and flows of this as they go through different rounds of private equity. And we'll talk more about rounds in just a moment. So as they go to one private equity group to another private equity group there could be some es and flows. You know the other difference that we see on how PE firms are very different is the level of involvement that they have on the deals. How much involvement do they have in the legal process, the due diligence process, this pricing and the structuring of the deals?
And is the private equity firm brand new financing, fresh financing that has just come in, or is this a firm that has been sponsoring this business for many years? And again, this defines somewhat what we're talking about, the round or the stage of financing, whether it's a round one or a round two or potentially even a round three private equity group. So, as we talk about these different stages of private equity and we talked about, you know, different rounds, okay, some of the rehab strategic acquirers out there are on their first round of private equity, some are on round two, some are on round three.
And what's absolutely paramount to you finding the best partner for you is you must have upto-date information in order to make the best decision because the round of private equity has a big impact on the company that's looking to acquire you. So it's imperative to research acquirers as well as their current stage or state that they are in terms of their round of private equity. Again, we talked about unique differences from one private equity group to the next private equity group and the huge impact that they can have on you and your deal.
The biggest areas of impact that we see first and foremost is cultural fit. Whether it's a round one, round two, round three or stage round, stage one, two or three, how does that impact the culture that you can expect? How does it impact geography? Where this these companies are looking to grow next? Where are their greatest needs? And do you fit those needs geographically? Growth expectations. Are there different growth expectations based on the round or the stage of private equity? And how will that impact you and your company?
And finally, structure, which is so critically important to the outcome of your deal, not just at closing, but to the long-term outcome of your deal is the structure of that deal. And certainly, whether it's round one, round two, round three stage, it's certainly going to have an impact on that structure. And all of these aspects, culture, geography, growth, expectations and structure, they all are aspects of the match. And what will eventually and what will subsequently give you the best deal of your life is when you find the right match for your company.
So stay close because we're going to continue in this series and talk about each one of those aspects of the match, culture, geography, growth, and structure. We're going to talk about each one of those in separate episodes because they are that critically important. So if you are right now considering and looking out into that industry trying to understand who's round one, who's round two, what's the impact of private equity, click below, give me a call, let's talk. Thanks very much. I look forward to talking to you in the very near future.
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