Navigating The Current And Future Landscape Of Rehab M&A
An episode from the NEXTLEVEL Owner Podcast archive.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good morning and welcome to another episode of Paul Martin's Crucial Conversations today. Real excited to have a conversation with Joe Anzur. Good morning, Joe. Good morning. Happy to be here. Awesome. Awesome. So Joe is our director of mergers and acquisitions and is going to talk today on the topic that we are calling navigating the current and future landscape of rehab M&A or mergers and acquisitions. So Joe, let's jump in with some questions here of course. So, as an experienced investment banker specializing in rehab, mergers and acquisitions, share with the folks joining us today some of the recent economic changes that have really impacted this market and how have these changes influenced the landscape for potential deals?
Yeah. So really overall in the past couple of years is everyone's pretty much realized. I mean we're definitely in a rising interest rate environment and definitely everything has been impacted by inflation as well. Both in the general sense and wage inflation. So really how this is impacting potential deals. So we're really no longer living in what was previously essentially a zero interest rate environment. Now I mean really on the acquirer side of things these rising costs of capital I mean really limiting their overall availability of capital as well and essentially more stringent guidelines in order for them to deploy this capital.
So what that means is really what acquirers are looking for nowadays more so those high quality assets so that they can really receive that ample return on the capital that is deployed. So previously what they may have been deploying at maybe a three to 4% rate that's really touching up in the 8 to 10 plus range. So you definitely need that higher return on these assets, those high quality assets in order to really make it worth deploying that capital. So they got to get a greater return because no longer are they able to use, you know, in a sense kind of free money.
I mean it's money, it's capital, it's debt, but at no at obviously extremely low interest rate almost zero. So it really has changed things. Yeah. Yeah. So I mean deals are still getting done but definitely there just are more stringent guidelines than what we were seeing maybe one to two years ago. Yeah. Yeah. So you have now worked alongside of Tom Carden over three years. Yeah. Talk about the current state of the rehab M&A market and its overall outlook and are there any trends or opportunities that you know right now excite you about this space?
Yeah. So, like I just mentioned, I mean, with those couple of macroeconomic factors that are really coming into play in the industry right now, I mean, there's still some uncertainty over the next couple of quarters depending on how the Feds how the Fed ends up seeing things. If they continue to raise rates or if they want to kind of stabilize those in the ne in the second and third quarters and so forth. But again, it's still M&A environment is still strong overall and deals are getting done, but really at this point just at a much slower pace due to what was mentioned in the last question.
I mean, we're kind of past the point of really the record high M&A environment that was seen in 2021 and early 2022. Which really was never before seen. It was pretty unprecedented. But still I mean the interest is strong and it interest in the space has persisted and new players are still entering the space. I mean we're seeing new acquire new acquirers and speaking with new groups I mean really on a monthly basis that are looking to get into the space. Some that aren't as heavily reliant on debt and have that capital to deploy and are looking for attractive targets really as their platforms to make an entry into the space.
But really once rates stabilize and groups can really get a better sense of what their really debt service coverage costs are going to be for the year, I mean, you can definitely really better budget for the year and budget more efficiently and just be able to look at more opportunities and get a much more precise view of how things will shape out. Yeah. So what I'm hearing from you is that, you know, companies right now have slowed down a little bit. They haven't stopped. They haven't paused.
They've just slowed down somewhat as they are you know going through their deal processes and being a little bit more careful. Provide some examples for those out there that really interest illustrate the continued strength of this market. Yeah. Yeah. So I mean just Yeah. To echo on your last point, things are still happening, but people are just being more cautious nowadays. Obviously, no one wants to bring up the R, big R word, recession, but I mean, it it's just getting a bit tougher to operate and a bit tougher to finance these deals, but deals are still happening.
I mean, the continued strength of the market, I would say the biggest example of that, I mean, it's just I mean, I'll kind of rephrase it with this. I mean, we always advise our clients really if they're going to pursue going to market to do so during a time of strength during an uptrend. That really generates the most excitement from the acquirers or partners and ultimately gets them the best deal possible. But I mean, this concept hasn't gone away. That bar is just set even higher than it was before.
So I mean and an example I would say is really just in terms of the overall number of offers that we are getting in a given deal whether indications of interest or letters of intent. I mean those numbers haven't gone down really. I mean again that's a big example of how that interest is still there. It's just we are making sure that we're not bringing companies to market that aren't ready. You need to be in a really in a stage of strength and be in a position to get people excited to want to partner with you or invest in you.
So, I think that's a big example. Yeah, great point. Great point. What are some of the key factors that you are seeing that will contribute to a successful physical therapy sellside acquisition and how do you identify and capitalize on these types of opportunities? Yeah. So, I don't think this has really changed over the past few years, but it's always the owners who know their business and have a strong presence in the communities and where they operate. Those are the ones that typically get the pretty much more value for their deals because really there is a direct correlation with how much you know your business and your overall involvement as kind of a correlation between those as well as the financial and operational performance of the company themselves.
So, in a world where partnership track transactions are still very prevalent, as opposed to just 100% buyouts, I mean, obviously those are still happening as well, but you're not really getting as much value as if you really are in this long-term partnership. Yeah, I mean, the strong operators who are continually invested in their business's future and they're known to provide that high quality care for their clients, they're always going to make out in the long run. Yeah. And you know for those of you out there what you just heard from Joe is you know one of the ways to capitalize on opportunities that are out there he didn't talk about EPIDA he didn't talk about driving your operations what he talked about was knowing your business and I think that is that really because that hits on all of those and you know this is a good time to have someone and obviously We offer this service in what we call an outside in assessment.
Have your business assessed. Take a look at where you are in order to really know your business. And that will either put you in a position where you know you should go to the market now if that's something you want to do or it'll put you in a position on understanding what you need to do to get there. Yeah. Yeah. And I'm not talking to the point of micromanaging getting to that point of knowing your business, but really just understanding month-to-month trends, week-toeek trends, where are you financially and operationally compared to where you have budgeted?
Just understanding things of that nature, looking at overall productivity measures. People that are really in tune with those types of metrics definitely make for a much smoother process. Yeah. Yeah. So Joe, in your opinion, how do you foresee the future of rehab M&A unfolding and are there aspects of this market that you see as potential growth opportunities for our clients in the future? Yeah. Yeah. So, like I like I mentioned before, really the past couple of years, 2021 and early 22, I mean, we were a record high, I mean, M&A volumes and really the industry as a whole was as well.
And the amount of recapitalizations that happened and really large M&A transactions in the space, I mean, that definitely altered the industry's landscape. And I mean given this and some of the current macroeconomic trends, I mean I think this really has been a perfect time for a lot of acquirers to really take time to focus on internal integration and strategize for the next two to three years. Especially those that are kind of in the middle of the private equity cycle and they're thinking, okay, we pretty much really optimize our internal operations.
Maybe two, three years from now, we look to potentially recap. What do we want to do? Kind of restrategizing on both the internal side and looking at denovo growth as well as looking at the really inorganic growth on the M&A side of things and looking at acquisitions. But I mean that being said there's still numerous recaps that have occurred since beginning of COVID and there's probably more that will come in the next year or two depending on how the economy shapes out. So that's really going to provide a lot of fresh capital to be deployed in the industry.
And really once the dust settles and the market stabilizes, we'll probably see a nice ramp up in activity again. Yeah. Yeah. You know that we talk a lot and we are seeing a lot of focus right now kind of you know in all industries on founderowned business acquisitions versus acquisitions of private equity-backed companies and you know this really opens a door because you know all of our clients are founderowned and operated businesses and I think it has opened a door for you know many of those folks out there in the industry right now because as Joe so said if you know your business there are buyers also as Joe said some of these you know large acquirers are taking a little bit of pause and focusing internally on driving their business with new startups as well as you know improved metrics etc.
That's given the next generation of acquirers an opportunity to kind of jump on some deals that they may have gotten, you know, beat out of with some of the larger companies. So, Joe, as an expert in rehab mergers and acquisitions, how can a rehab business owner make sure that they align with their strategic goals for the organizations and all the owners involved? Because we know how important that is. And then kind of navigate the specific challenges that come with very high expectations for a great deal and with the best partner.
Something we talk about every single day. Yeah. Yeah. Absolutely. So really in every deal that we that we do every single potential partner or acquirer will ask in some way, shape or form the same three questions. Number one, why do you want to do a deal? Number two, why do you want to do a deal right now? Number three, what are you looking to get out of a deal? Or really, what does an ideal transaction look like to you? And I think just best understanding your own responses, your genuine responses to these three questions will definitely help narrow down the list of potential companies to even speak with.
And as you go about the process, it's really important to know that you're interviewing the acquirers and part acquirers and partners as well. So asking them questions such as, okay, what does an ideal partner look like to you? Or what does an ideal transaction look like to you? And so forth. And that will definitely help navigate a lot of these uncertainties and definitely paint a much clearer picture as you go about the process than kind of day one kicking things off. And you mentioned before, I've worked with Tom Carden for a while now and worked through dozens of deals with him and I've heard him say at least a hundred different times.
What we always prioritize is people culture in a deal. That's the biggest factor in getting the best value and the best deal done. And then the transaction, the overall transaction structure and basically the deal valuation will follow suit. But people culture that is always number one and we always try to really echo that and really ingrain it in our clients heads. Yeah, absolutely. You know I also you know I hear you guys talking about this a lot with your clients which is you know what's the criteria by which you know you as the client are going to evaluate the acquirers as you just described.
You have to be asking the questions in order to understand if that is the best match. They're going to be asking those same questions. Joe, share an overview if you could of, you know, what we are seeing as kind of the new due diligence process for rehab M&A track transactions. Certainly we're going to get into a little bit more detail on this with our due diligence expert Michael Rpolei but Joe share a little bit about what's going on with due diligence now. Yeah. So I guess to sort of rephrase your question I mean I don't really think it's much of a new process at all but just more so just really a more sophisticated one nowadays.
And I mean as we and acquirers and partners continue to really close more transactions and become more sophisticated in the space really every day, every week, every month. I mean, we all learn what works and what doesn't work, what runs smoothly, and really what needs to be improved both in a process, in a sale process, in due diligence, post-transaction integration, and so forth. I think one of the big changes that we've seen in the past year is just a growing reliance on third part third party specialists whether it's on the financial front or compliance and billing and so forth that really help acquirers in their diligence process because again the volumes have been through the roof recently and they've developed these relationships with third parties and they realize hey this actually works a lot better than maybe if we were to do it internally.
So, we're seeing a lot more prevalence on that front. But again, like I said before, the acquirers that know their businesses and the more organized and documented you are, the easier a diligence process will be for you. And that goes regardless of the call it sophistication of the process. I mean, if you know your business, you will be fine. If you are organized and keep everything documented, there will be nothing to worry about. Yeah. Yeah. Yeah. Again. Just in hearing the discussions and being part of many of these discussions, it just appears as though when companies now somewhat, as you said, outsource to, you know, very focused, you know, groups on compliance, finance, you know, you know, quality of earnings.
Those groups then have to prove while they are a part of the process. And so it almost seems to me as though they are digging deeper because of you know these outsourced companies coming in which makes things just that much more difficult. So finally Joe how does Martin Healthcare Advisors differentiate itself in this very competitive landscape of rehab M&A advisory services? What unique value do you bring to clients seeking guidance for their biggest deal of their life? Yeah. No, I mean that great question. I think with us it's really it comes down to the overall knowledge and relationships that we have with some of the most active acquirers in the industry.
I mean, you look at the top 20 or 30 companies by size in the physical therapy space. We've done deals with pretty much almost all of them. And a lot of them we've done I mean numerous deals with. So just in terms of the value brought to clients who are seeking guidance, I think a big piece is just understanding the pain points between with the acquirers as we go into a process and also understanding what they really consider I mean for lack of better words to be best practices and as we prepare you to go to market.
We want to ensure that you are as closely aligned to these best practices as you can be and understand what those pain points might be on acquirers and as you meet them and have introductory calls with them and meet them in person. Just being able to navigate through that and really have the most efficient meetings possible and really develop those best relationships that you can. Absolutely. You know, I will for all of you out there, you know, I have been working with physical therapy businesses in this light, mergers and acquisition since 1999.
So, been doing this a long time and it really has been my dream to have a team around me, of folks that know as much and even more about their specific areas of this business, the rehab, the rehab M&A industry. And I definitely have found that as you can hear from Joe Anzur today. So Joe, thank you. I really appreciate this today and you actually guided me in some areas that I have may not been so clear right now and I'm sure you gave a lot of great information for those folks that were watching today.
And for all of you who checked in today and watched our conversation if you want to have a if you have a question for Joe or myself, click below. Let's talk. Thanks and have a great day.
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