Key Traits This Acquirer Believes Will Lead to Better Deals in 2023
This week Paul welcomes back Steve Dipaola, CEO of Empower Physical Therapy, to discuss his company's success over the last 12 months, and what he sees as the most valuable attributes in a potential partner.
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 are excited to have with us Steve Dalo. Steve is the CEO of Empower Physical Therapy. And Empower Physical Therapy is a private equity-backed physical therapy company based out of Phoenix, Arizona. Have now grown to 45 plus clinics located in California, Arizona, Louisiana. I almost said Los Angeles, Steve. Sorry about that. Louisiana, and Texas. Steve, it is great to have you with us today. Thanks, Paul. It's always a pleasure to speak with you on a regular cadence and share any information with your teams.
Well, thank you and I and I appreciate because as our listeners today know you have been with us before and you always provide us with a lot of really great valuable information. So Steve, a lot of changes and a lot of progress with empower over the last 12 months and I think even more recently. Can you kind of catch us up to how things are going and kind of the state of the union on empower? Yeah, sure, Paul. It's been an exciting time for us. As you know, we're a younger company.
We're just shy of five years with the original five practices coming together. And then we've talked about other things around integration of five practices becoming one. The COVID year then a year to really kind of get our legs under us. So really last year was a was a great year for empower. We were able to have conversations with great practices over the period of a year and a half, some up to two years and we have really now kind of found a way to continue the conversation with those folks and bring them in and join our great practices of PTS and OT's.
So, it's been a really satisfying and engaging time to think about private practice and the spirit of continuing to move forward and have great PTs and OT's join our group and add to what we have been and more importantly who we'll become going forward. Yeah, absolutely. And that's all real exciting stuff. I think next time we get on and talk, you know, maybe sometime later in 2023, we might be talking about a 100 plus clinic company. I know it's not all about dots on the map, Steve, but I'm sure Sheridan, your private equity sponsor, is excited to see you know, some of the more recent growth and developments for you guys.
So, yeah, congratulations on all that. Thank you, Paul. So, [sighs and gasps] we Steve, as you know, and I'm sure you're getting a lot of this too, we're getting a lot of questions from our current clients, prospective clients, and there seems to be three major questions that come out in just about every discussion and I'm hoping you can shed some light from your perspective on these questions. So, first, how are you seeing the increase in borrowing interest rates impact what a deal will look like from acquirers like Empower now moving in and through into 2023 in terms of multiple structures?
How is that going to change from where we've been in 21 and 22? Yeah, I would say one of the biggest things that I see now compared to prior times is a little more requirement around speed and execution. So again, in the past I think there wasn't really any time related pressures or certainly external economic pressures that were related to deals. So, I think as we see this, there is still interest for sure in adding quality practices onto a platform like ours, but I would say that there is some need for owners to be ready emotionally, to be ready from a process and information standpoint and be ready to move forward.
I think there is some expediency within both sides both owners and potential buyers here to really understand is there a great fit to understand each other's side of the business what the expectations are mutually going forward and then to work on a real efficient way to move through a process. I would say on the other side, you know, the multiples are still really driven by, you know, quality practices, strong performance, and for us, first and foremost, great culture, great people, and a story that fits with the private practice mantra.
So, I think there's still plenty of interest and appetite, but I do believe the process probably needs to move at a little quicker rate than in the past when things could kind of wait itself out. And Steve, what do you see with speed? You know, we always, talk to our clients about speed and accuracy. The speed side of that, you know, from a private practice business owner can sometimes be a little overwhelming. [snorts] but how do you see that all that works together? And why in this current market has that become something that seems almost you know a requirement for some of these practices to be able to work with speed and accuracy.
Yeah, I would say that related to that it isn't just working out of haste by any means. So it is really being understanding and committed and able to make a decision that [clears throat] the partnership is right. It's right culturally. It's right business. It's right for clinical practice. And I think once that decision is made, then there has to be an ability to move into the diligence phase. And I would hope that all this is what I consider pre-diligence to make sure that fit is there.
And then once working into the diligence phase is to understand the business from the people, the teams, the culture and then certainly the business metrics. You know what the earnings look like, what the local competitive landscape looks like from reimbursement and productivity requirements and all of those things that are really important and paramount to running a successful private practice. So I think it comes to making a good decision not a hasteful one but having information and data that is industry standard and available to review to ask questions to move through the process both from a financial standpoint a legal standpoint and a people standpoint for sure and I don't want to put words in your mouth but could this be a process for companies like you guys where You might be a little more selective with those companies that can actually get to the finish line and you see a clear path getting to that finish line based on some of the initial information that they may show you etc.
Versus, you know, kind of hanging on to some of those companies that really aren't ready. Yeah, I think it is it is a new look here. We want to make sure that people are invested both emotionally and from a business standpoint and ready to be part of something larger and hopefully a special place to move from what they have done in the past but to move into the future. And I think if we see some resistance around you know the information andor processes of how I have always done things to how should I do things or how might we do things in a in an efficient manager manage efficient manner that [snorts] really we can move through things and folks are really ready to take that next step.
So, today more than ever, I think early on in conversations, we're trying to understand people that are ready both again emotionally and business-wise to take that next step. And if you're kind of kicking the tires this day and age, I think it moves you down on the list of potential targets. Yeah. Yeah. What a great point. And you know Steve to empower you guys offer such a unique but also a very powerful structure in the way in which you guys you know look to partner with companies that to me someone could make a decision fairly expeditiously on whether or not that works for them or it doesn't.
Because again it's unique but it's also really powerful long term. So h how are you seeing that the shortage as well as the increase, you know, you hate to say inflation for professionals, but we're hearing it and seeing it all over the country. How is the shortage of therapists and the increased cost for therapists? How has that impacted how you now look at a deal and how has that impacted empower directly? So we know that the labor pressures are there for us just like all of our colleagues and we know 15% of our colleagues left the profession through pandemic related decisions and it is supply and demand.
More professionals both new and experienced professionals are being keen to work life balance. They're also understanding that there are more options for them in addition to traditional outpatient PT, whether it's home health or inhome therapy or other avenues for sure. So, we're trying to make sure that people really love the outpatient game. We know that markets dictate rates. So, we want to be able to attract and retain our great therapists. But we're also having to be flexible around schedules, around locations, around what people need in their personal lives as well in addition to serving the needs of the business.
So it is something that we continue to work on both from a retention of our great teams now to be understanding of what they need in their both their personal and their professional lives and then really to look at options around staffing models around supplementary help of having people fill in the needs of full-time equivalents that might have a couple of people versus one full-time equivalent. So, we still want people that love to practice in outpatient orthopedic private practice and we're finding that markets are dictating rates and we're responsive to that.
We also want to make sure that we show people that a place to work is more than comp. It is about culture and practice and teamwork and those sort of things. And we feel like there's still a premium on where you work, not just what you're compensated with. Yeah. We hear over and over again that and I don't know if this is new but you know skilled nursing facilities sometimes hospitals you know they're able to pay more they're able to do larger signing bonuses than we in private practice even private equity packed companies there's a salary level that makes sense for an outpatient clinic based on reimbursement so and they have these enormous student loans so you know for the therapist It's it's a really tough decision sometimes to you know go into that private practice setting and so I think companies like yours Steve where they can see that they can you know certainly move up escalate themselves become part of something bigger you would think would be attractive to some of these younger physical therapists and I think we'll see you know that migration and I think a lot of these therapists that are in those, you know, types of positions are going to find that yes, there's more money, but it's not really what they signed up for.
And I think we'll see a migration back towards private practice and, you know, general orthopedic outpatient. At least that's my hope. Yeah, mine as well. So, again, we think practice of satisfaction of where you practice and your clientele is important, but the economics without a doubt are playing into this. And so, you know, we continue to fight the fight around economics and peer reimbursement and some other things that hopefully will make it more attractive and the economics work for private practice to compete with those other settings.
Sure. Sure. And you know, the last question we seem to get is general inflation. And I never thought that general inflation would really have an impact on the PT business again because you know it's supplies, it's but you know it's rents, equipment, you know what impact does general inflation have on the ability for a PT business owner to successfully sell their business and join a larger partner now that we're, you know, deep into this in 2023 with inflation. Yeah. That really is a key factor as we think about operating at private practice industry standard best practice margins.
Again, there's plenty of want and desire and interest in patients pursuing the great PT first model in comparison to other things. But the ability to run a practice with all these inflationary pressures around overhead and labor and administrative costs and challenging reimbursement certainly does challenge both target practices and our practices dayto-day to run at a margin that we feel is appropriate for outpatient private practice. So our approach is really to look at non-patientfacing efficiency. So we do need to be productive. We understand that's part of the model, but we also have to be very efficient in our administrative costs, in our overhead, in our all things that are not patientf facing to understand that we still have a responsibility to deliver the care at both the consumer level and our communities expect.
So the way that we want to do that is to really improve our efficiencies around the administrative side of business. And we still really look towards hitting those private practice margins around our ability to operate profitably as well. And you may have touched on this before, but you know, all of these economic conditions that we're talking about, obviously the inflation, increased interest rates, you know, how has this changed what Empower is now seeking from a partner in 2023? Maybe different from back when you first got started in 181, 19 and through COVID.
How has that changed? You know, I think again the things that haven't changed is we want really engaged private practices and hands-on owners. So, I would say it's important for us that people that are coming in to partner with us really understand what the economics require these days. I think our partners know they have to be hands-on and working in the business. I think there are a lot of sentiments out there around consulting to say you should work on your business more than working in the business.
For us, we're a we're a company of all PTs and we all still work in the business each and every day. So, I think we look at targets that really understand that they're hands-on business owners. They really understand their economics, their structure, their overhead, what's driving their earnings, what might be a challenge to that. So what hasn't changed is we love great, passionate private practice owners and clinicians and we just hope that people are aware that there are some economic pressures that require us to be productive, to run efficiently and to you know, still come out with what we consider a successful practice, which is great outcomes and great business results.
Yeah. What I hear you saying there is that clinical outcomes are ob you know obviously paramount to this business clinical care etc. But there needs to be a focus beyond clinical care to have an opportunity to be a partner for empower in 2023 and probably some of the other large companies as well. Yeah that's exactly right and I think it is a balanced focus. We think about that great clinical care a level of compliance but also some professional intelligence around billing and coding and reimbursement and productivity and all the things that drive our practices.
Yeah. Yeah. Yeah. Great stuff. So, put your private practice hat, you know, on. Although you're, you know, big private equity-backed business and, you know, on the on the business side now, Steve, but, you know, you were once a private practice physical therapy business owner. What do you see will be the biggest challenges for private practices short of potentially wanting to sell their business or partner, but just for companies that just want to remain independent and continue through 2023 and beyond, what will their biggest challenges be?
Yeah, I think it's some of the things that we've already hit upon and again, it is really trying to maintain that independent and successful nature in and of itself. So we know there is a ton of administrative burden right now in the practice that comes from regulation. Again we're a practice or we're an industry and a health care business that is highly regulated given the the safety and concerns around public interest there. So I think for me looking at it is the reimbursement challenges that continue to be flat and compressed.
In in addition, it is the rising not only labor costs, but the general overhead costs. And so with the administrative burden, I know we talk about putting my private practice hat on. We always say treating the patients is easy, but we think about the administrative burden around utilization, management or trying to create a picture through documentation and other ways to really show the medical necessity for our care. And again, we know there's a great story in PT first and the options related to physical therapy, but there are barriers to be able to offer our care.
And so, it is administrative burden. It is the payer compression issues and I would say you know again labor is something that we have to look at. So when I when I continue to look at that, I'm not so far away from private practice. That's been that way for some time, but I think the administrative burden and the regulation continues to increase in the face of the fact that we should be first and foremost in the muscularkeeletal healthc care thought process. And I think that the systems and the people that are the decision makers and have control of some of that certainly need to change their approach and make it less of a barrier for us to deliver our care which is both cost-effective and a great outcome for our patients.
Absolutely. Absolutely. Steve, you have been such a great help today. And I'm sure private practice business owners out there that have heard you today, have received a lot of value from this. You know, I'm absolutely going to predict that empower is going to be a force to be reckoned with in the future. You guys, and based on your leadership, I really think you guys are going to do a lot of great things in a lot of great markets for a lot of great people. And it's just been great to kind of see you along that ride.
It's been great to be involved in, you know, a couple of those transactions. And you know, it's just it's wonderful to be able to sit back and watch someone like yourself have this kind of success and continue to drive this business into the future. Again, really appreciate your time, your energy, and the valuable information you provided to our great subscribers today. Thank you, Paul. It's always a pleasure to be with you and to be able to talk PT language with you and also to share that we are committed to the future of the industry that we love so much and have put so much of our lives into and we really hope to take this to the next generation of great strong private practitioners to keep that alive and well for the future.
So appreciate give the opportunity as always. Yeah, very well said. Very well said. So for all of you that checked in today and listened to my conversation today, my crucial conversation with Steve Dipaola, if you have any questions, just click below and we'll talk. Thanks and have a great rest of your day.
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