Can a New Round of Funding Change an Acquirer's Culture?
Paul examines how an acquirer's stage or round of private equity funding can shape its culture, and how PT business owners can define their own culture to find the right partner.
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 are going to continue with our series of how does the stage or round of private equity. How does private equity have an impact on what we're calling the probably the biggest deal of your life? And today we're going to examine what impact that has on the culture or the cultural fit that you're looking for your partner or for the company that you are willing you're interested in selling to. So let's jump in and talk about how private equity stage and round of private equity and what impact that can have on culture.
Over the years as we've looked at creating the best deals for our clients. The order of importance has always been first and foremost that cultural fit. Second is structure, the structure of the deal. And third tends to be price. And in that order, we have seen some of the best deals being created. So, we're going to examine today how the stage or the round of private equity impacts the culture that you could expect from the company that you would be partnering with. I think first and foremost for you to be able to find the best culture for your company and to match your company first and foremost is to find what is your culture.
Can you define your culture in just one or two sentences? You know, Larry Benz, a few weeks back, we talked to him a little bit about culture, and he defined it as it's the proper way to behave in your company. It's the way people behave. And I think the way people behave can also be narrowed down to the way in which folks communicate. How do the folks in your company communicate? How do they talk to each other? How do they communicate and talk to patients, physicians, and others in the community?
You know, it's revealing when we go on site to companies and you're in a clinic and you watch a front desk person or maybe even a therapist communicating to a patient with very positive communication. They're smiling and they're engaged and then they look at a co-orker and it all changes and you wonder, is this really a part of their culture? This, you know, positive influencing type of behavior or is it just a mask that they put on for patients or physicians? And so, how do you and in your company, how do your folks communicate not only with patients and physicians, but with each other?
And in addition, how do your people manage change? That is a big factor as it relates to culture. And for you, what are your values? What are your beliefs? And do the folks do the people in your company share those beliefs? Is it a company belief or is it just your belief and value? Then finally, is everybody on board with your communication style with your beliefs with your values and the way in which you are expected as someone as a part of your company to behave.
So first and foremost, we have to define what your culture is if you're going to find the best match in the industry. So once we've done that, and that's a takeaway from today is to start to try to define your culture today. What impact does the round or the stage of private equity have as it pertains to the culture that you may find in one of these strategic companies? And again, round one means it's the first private equity group that may be sponsoring or backing a company.
Round two could be that first private equity group gets taken out by a second private equity group. Now they are on round two. And there are some very distinct differences as it pertains to the potential culture that you may find with a round one backed company versus a round two. So again, this is generally and it does not fit. Everybody does not fit in the same box in terms of the acquirers that are out there. But generally round one, these are smaller funds. So the private equity group tends to be a little bit more handson with these strategic companies.
There may be some learning in the space or the industry. Meaning the folks in the private equity group, most of them probably have never ran, managed, owned a physical therapy clinic or a physical therapy business. So, they're going to be new and they're going to be there's going to be a learning curve. Typically, there's a little less of a corporate feel, but again, this is a fund. These are funds. These are large funds, and they are providing capital for these businesses to grow. So these are business people, but in a round one tends to be a little less corporate feel.
And culture could very well be defined deal by deal because some of these round one companies, they buy the first company and then they look to grow by buying another company and kind of adding that. Well, whether it's in the same state or different states, it could be a new set of culture for each deal. So, as these companies that are a little younger, the culture could be very different depending upon where they are geographically or depending upon who they have acquired. And what we commonly see is that the level of support and development is not quite as built out in a round one private equity-backed company as typically a round two.
So the level of learning opportunities for staff and supportive staff etc. Typically is not quite as developed and built out in a round one company. Now, round two companies, these tend to be larger funds because they're going to buy out that round one company. Okay? So, these are larger funds and they actually tend to be a little bit more handsoff. Why? Because they're going to in just about every case bring in highlevel executives to join that strategic acquirer, join that physical therapy team. Okay. At the executive level and what I think is really revealing about some of these round two private equity-backed companies is that if you look at their executive groups, yes, they've inserted highlevel executives in most cases not physical therapists, but in many cases they have remaining on that executive team, physical therapists, leaders from that first round of private equity that have stayed on and continued right into round two.
Now, potentially there could be a little more of a corporate feel to this. This is larger. It's bigger. And so it tends to have a little more of a corporate feel in a round twobacked company. And the culture tends to be a little bit more well-defined because they've had that time frame on their first few acquisitions to kind of bring that together into one singular culture. But it still could vary based on size and geographical separation. I mean to say that based on one of these large companies that the culture in Rhode Island is exactly the same as the culture in Washington state or California is probably going to be a stretch.
In addition, round two companies tend to have a very wellbuilt out support structure and development structure for the companies that they acquire. And you're just going to see within these companies, there are going to be more folks with a business background. It just they're bigger. And that's what we commonly see from these companies that are backed now with stage two private equity. So, is there a simple formula for which is better for you, a round one, a round two, or a round three? Well, my answer to that is there is a simple formula because for a locally focused company, a smaller company or what we call marquee companies, you know, larger companies, 10 clinics or more, we have seen success with round one, round two, and even round three acquirers for both of those groups, locally focused companies and the larger marquee companies.
And what we tend to find is that those great deals are being done based on the culture criteria that you set. Then we help you set this. When you take your business into the market, you're creating very specifics on what you as the leader are seeking from a culture, from an acquirer, as well as bringing along with you, your values, your belief, your communication style, and really defining what you're looking for because I think in many cases you may find that in a round one or round two or round three.
And what's very revealing is when you're able to get face-toface with the executives in these companies and you're able to ask the very hard questions. And what we try to do is to get you to ask questions that will enable them to reveal stories that will help you determine whether or not they are a cultural fit. Stories tell all. Stories really give you an understanding of what kind of culture these companies are bringing to the table. And it's really important that you do this in what we're going to call quick succession to get perspective from one company to the next.
When we take a company into the market 100% confidentially and we then have those face-to-face meetings with acquirers who have provided indications of interest, initial offers to our clients, they're meeting with these companies backto back. That's when you can really get that perspective versus a wide separation in time from your discussions with these companies. And finally, information is critical to making a great decision on who is the best cultural fit. And information comes from years and years and years of seeing these companies and how they have behaved after the deal.
Prior to the deal getting done, many of these companies obviously they're trying to get you to sell their business to you, them to sell you your business to them. Okay. What happens after the deal is done and we can provide that in-depth information on prior clients that we have had who have had history with many of these companies. So if you would like to have a conversation with me about how you can find the best cultural fit out there and what impact private equity has on that, click below. Let's talk. I look forward to talking to you in the very near future.
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