Predictions for 2023 from a Large, National Acquirer
This week Paul speaks with Richard Leaver, CEO of Alliance Physical Therapy Partners, to hear his predictions about what the M&A Market will look like this year for Outpatient Physical Therapy. Tune in to hear what he thinks lies ahead for our industry, and who will get the best deals in 2023.
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. So excited we have with us today Richard Leaver. Richard is a physical therapist and he is also the CEO of Alliance Physical Therapy Partners. Now, Richard has a long and decorated career in physical therapy, having spent time with physio physiootherapy associates, ATI, and getting his master's degree at one of the best universities in the world, the University of Michigan. Now, Alliance PT Partners is a private equity-backed physical therapy company. They are based out of Grand Rapids, Michigan.
And they t currently have 16 unique brands, meaning 16 companies that they have partnered with that all are continuing to go under their unique and personal brand that they brought to the partnership. They currently have over a 100 clinics and they are in 16 states. Richard, it is great to have you with us today. Well, it's very kind of you. Thank you, Paul. And I I'm humbled to to appear on your crucial conversation. So, appreciate it. Yeah, when you hear it back to you think, man, I've done a lot, right?
I'm only 25 years old as well. So, yes, that's you've accomplished a lot in 25 years. Wow. Well, Richard, we have not had you as a guest and I would love to get, you know, kind of your update, State of the Union on Alliance. I know there's been a lot of changes, a lot of progress over the last year. Can you catch us up? Absolutely. I say Alliance is the best kept secret in the outpatient PT world. I don't know if it's the best kept secret, but certainly we've flown under the radar, I think, as an organization.
We're only about six years old, but the genesis of Alliance goes back over 40 years with Agility Health. So, we're fairly young with a new kid on the block. I believe we kind of got a lot to prove and we will. So we have approximately about 110 clinics at the moment. As you say, 16 brands. We also a little bit different. We have industrial injury prevention services, work fit and also we have virtual PT and even custom orthotics business. The one change that I think is significant is we did change equity sponsor just over 12 months ago.
So we've kind of moved on to a company that's called BPOC Beman Pacio Keith and that for those that are familiar with the private equity space they really are experts. They really are a class P business over 20 years pure play healthcare experience. So we're very excited and happy to be partners with BPOC. Yeah, we were we were really impressed when you guys announced that partnership because as you just said, BOC is, you know, again, we're seeing this in the rehab industry that some real strong well-funded as well as, you know, solid thinking private equity getting into this industry and BOC is certainly you know, one of the best right now.
Yes. I say it's really going from where we were the not even the minor leagues. We're in the little league before BPC and we we've moved into the major leagues. They bring some really heavy firepower with them. Absolutely. Absolutely. You know, Richard, I'm sure you you're getting a lot of these same questions. But we're getting a lot of questions from current prospects, our current clients. But there are three questions that seem to be at the top of this list and just about in every discussion I have and I'd love if you could shed some light on a couple of these questions.
Absolutely. Yeah. So, first is how does or how do you see that the increase in borrowing interest rates will impact what a deal will look like from acquirers like Alliance in 2023? Looking at multiples, structures, how does this impact them? Yeah, it's really interesting. I think keeping it fairly simple, multiples are going down. What we've seen really in the last six months or possibly a little bit longer than that is for the very large entities that are going through a deal process the multiples are probably dropped down a couple of clicks and then that's going to filter down through.
So I think the value of the business is going to be perhaps a little lower. For the smaller entities when we look at look at partnering or acquiring with entities for those smaller entities you know one or two clinics or even five or probably even 10 they won't see that such a dramatic drop in multiple but there will be some downward pressure on in multiple and then obviously overall valuation but the fundamentals still remain strong. There is a huge amount of private equity money sitting on the sidelines that really needs to be used.
So there's going to be a lot of interest in partnering and acquiring entities. There's going to be still a lot of money out there, but I think the level of risk tolerance is a little bit less and I think entities like Alliance and other entities are just going to be perhaps a little more selective and perhaps do a little bit more diligence with regards to what they look at and what they eventually decide to purchase. So maybe squeezing down on the number of deals that are done, but what I'm hearing from you is that the higher quality companies with that have, you know, significantly lower risk are the ones that are going to have the best chance at making it to the finish line.
Did I coin that okay or Yeah. Yeah, absolutely. Our belief and understanding particularly with a with a a very sophisticated equity sponsor. Our understanding is really inflationary is t transitory. It will come and go and yes at the moment it it's certainly painful for a lot of people and the cost of money will will change somewhat in the short to medium term but fundamentally if you are running a successful business that is has sustainable growth and well structured and appropriate margin really the macroeconomic components are somewhat noise.
The essentially the what we're looking at is exactly the same but perhaps just a little bit deeper. Yeah. Yeah. And it you know I've heard from some companies and going to PPS this year that you know where the multiples had gone and the structures had gone was almost out of market. I mean, it was almost, you know, unheard of some of them all. So, it's going to come down maybe to reality, but as you said, the dynamics are all still there and good deals are still out there.
It may just be for the better, more prepared companies. Absolutely. You know, that there is a shortage of good entities to partner with. That's the bottom line. And there is a lot of money and a lot of entities looking to partner and acquire. So, so it's still a healthy environment and to your point really with regards to valuations, I think what one has to understand is the valuations the last 2 three years prior to kind of this this downturn inflationary pressures were abnormal that wasn't really normal within the market.
So what you're really seeing is a return to normality rather than necessarily depression. Yeah. Yeah. Yeah. Great point. Really good point. So Richard, how has the shortage of therapists and the increased cost for therapy professional staff, how has that impacted how you look at a specific deal and how is that impacting Alliance PT partners? Yes. So two separate things when we look at the deal. Obviously staffing is a critical component in many ways. The majority of the value of the business is good well goodwill and that goodwill is really based upon the ability to staff and maintain staffing and the appropriate level not only appropriate levels but really the longevity of those clinicians that have the relationships with the referral sources and able to be what I would say rain makers.
Yeah. So if there are problems with staffing then that will definitely raise some concerns but the bottom line is it's it remains the same. It's all to do with revenue growth and EBIT and primarily for the smaller entities it's EBIT. So yes, we will look at flight risk of employees and also you know how many perhaps clinicians there are in order to make sure that if we're going to partner then we're not going to essentially buy an empty clinic. But really I think from a private practice perspective, it's still maintaining acute focus on revenue growth and maintaining margin.
That's really going to be the key thing is how can you how can you change or adjust your practice and clinic in order to be able to maintain E maintain margin that's really as important as over to overall IT. Sure. Sure. Yeah. And you know the third question may be a little bit of a duplication but it does seem like you know general inflation not only for professional staff but for supplies rent etc. You know how will this change the ability for a PT business owner to successfully sell their business to a larger partner in 2023?
Yeah. As I said, I think because of the shortage of quality assets, I think it's still going to be fairly easy to find probably multiple entities that look to partner or acquire. I think it's only those practices that are struggling financially and probably struggling since COVID to be honest that are going to struggle to find a new an acquiring entity or a partner. So long as practices are still focused on the fundamental KPIs of that practice be they operational and financial I think I think in 2023 I think it's going to still be a great year.
There's going to be a lots of deals still and hopefully the impact is going to be small on those that decide to sell in this coming 12 months. Sure. Sure. So, what have been some of the biggest changes and you know you spoke about BPOC in your introduction. What have been some of the biggest changes as it relates to how Alliance now goes through an acquisition process with BPOC as compared to the prior private the previous private equity group? Has the process changed? Yes and no.
What BPOC's allowed us to do is really given us the resource and backing to be able to look at anything from a single practice through to a company that has over a 100 clinics. Whereas before with our prior equity sponsor, we really didn't necessarily have the firepower to be able to look at the larger deals. But now we have that sophistication credibility of associated with a much stronger PE company as we say. So from a size perspective, it's really allowed us to enter into a different arena, up our game and consider any size deal because we have access to debt and really that access is I won't say unlimited but certainly more freely available to us.
Regards to the fundamentals looking the business and how we how we go about it, it's always the same. It's really we're looking at financials structure of the business staffing and culture and I think culture is very often missed and forgotten because that's I believe really the secret source of whether it's going to be a successful not only deal but also successful integration. How much does BOC drive the culture piece to that? Because you know there's this misnomer out there or you can tell me maybe it's not a misnomer but there's a lot of folks out there you know private equity just wants a return private equity just wants to buy businesses to consolidate and then get out.
I mean what is their view on how you guys will pick and choose the partners that have that cultural fit? Yeah, as you really inferring not all PE companies are the same. In fact, there's a vast difference. What I will say about BPOC is, you know, one of the first things they said to me is we're not operators. Extremely clever from a financial perspective, but they know that they're not operators. So, they leave Alliance to create the culture and the operational framework we operate in. That that's really important.
And the other thing about BPOC is they truly understand that yes the typical private equity has a life cycle but to really add value to a business and to really optimize and take new partners to the next level you've got to invest very heavily and you've got to think long term rather than short term. So as an organization certainly since our new equity sponsor came on board we have spent a huge amount of money investing in the infrastructure of the business not for the next one two years but really for the next 10 years and that's really when one is looking to partner with an entity that's really what the private practice needs to look at is the acquiring entity truly set for success and from being able to take one's legacy and what you've built and truly take it to the next level and beyond rather than this shortterm perspective.
Sure. Sure. And you know, it's very interesting you say that because you know, as you know, the typical private equity cycle is about five years. But what I'm hearing is whether BOC decides to either reinvest or to, you know, transition to another private equity group in five years, they're already planning five years beyond that. So whoever would come in would already be able to see where that's headed, which will obviously position Alliance extremely well. Absolutely. A sophisticated private equity company not only is planning five years ahead, but they're actually planning an exit even before they've acquired the entity.
And not only that is they a PE really should be flexible with regards to that time frame as well. So again, it goes back to this idea where we are focused on building long-term sustainability and growth because that's really truly where value is anyway. People are sophisticated enough and astute enough to see through short-term increases in Eb through pulling levers that really won't get you to be successful in the long run. Right. Right. Absolutely. So based on you know all of our discussions is there and the economic conditions etc.
Is there anything different that alliance is now seeking from a partner than maybe previously? No. It's a simple answer but I think what we are doing is we're just perhaps taking a closer look under the hood. You know it's a bit like prop it's a bit like the property market you know previously until recently people would buy a house unseen almost and I think a lot of entities entered into acquisition or partnership without truly doing the full say house inspection and diligence. So I think the only thing I would say is because money is becoming a little bit tighter, risk tolerance is going down.
I think just the level of diligence is going up. But what I will say is we see this as an opportunity. Any any of these headwinds, we see them as opportunities. The good companies will take this an opportunity to go out and find more partnerships, not to hunker down. And what's been clearly shown time and time again is those entities that are proactive during this time will come out the other side much stronger. And that's really what we're hoping for. Absolutely. Yeah. Absolutely. You know, and I and I don't want to bring up another company while I'm talking to you, but you know, we're all familiar with USPT.
And years and years ago when companies were doing all sorts of different things with the way in which they're doing acquisitions, you know, USPT has just been like this steamship. And as you just described, it sounds like that's the tact that you and BOC are taking now is you're gonna continue to be that steamship through the ocean and not, you know, taking all kinds of beers, but continuing on the same path. Yeah. I use the kind of the story of the the fable of the tortoise and the hair.
Eventually, the tortoise will win. And I that's why I kind of go back to this concept of, you know, we're the best kept secret. We're a secret. Well, not a secret, but we are slow and steady and that is what wins the game and provides that stability and framework for future success. Sure. Sure. So, put on your private practice hat for a minute here if you could. Because I know you've been you've been involved in the physical therapy industry for a long time. What do you see will be some of the biggest challenges for private practices maybe that have no interest in transitioning or partnering?
What will be their biggest challenges in 2023? 23 I think it's two primarily that's recruitment and retention and also managing the reimbursement cuts. So essentially what one has to do is one has to not only continue to optimize the business but also understand that probably they're going to have to develop or accept a lower margin. Now that's not to say we're going to operate at a margin like a supermarket but we can't maintain the level of margin that traditionally therapy has been operating at. I think it's understanding that now obviously as a private practice owner it's more about cash flow rather than perhaps ebita but even still it's got to the point now with reimbursement levels where you're just going to have to be just a little more careful and perhaps run a little bit faster.
Absolutely. Absolutely. Richard, this has been so enlightening and I am sure that for our listeners that they have received a lot of value as to hearing from yourself how you kind of see this world of physical therapy and what we can expect from acquirers like Alliance as well as others and how to make it through 2023 and come out looking good in 2024. I want to really thank you for taking the time out of, I'm sure, a very busy schedule to spend some time with us and to give our subscribers value.
I really appreciate it. Well, thank you so much for the opportunity of speaking to you today, Paul, and indirectly all those that listen to your program. Thank you. Thanks again, Richard. So for all of you out there, if you have any questions on my discussion today with Richard Leaver, just click below and let's talk. Thank you and have a great day.
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