The NEXTLEVEL Owner Podcast · Episode 167

2024

Paul interviews Navid Hannanvash, CEO of RISE Physical Therapy, who talks about how his company is ready to adapt to any acquisition.

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 going to have a conversation with Naveiv Hanvash. Navided is the CEO of Rise Physical Therapy and Rise is absolutely at the forefront of the next generation of acquirers. Rise is a private equity-backed company based in Solano Beach, California. They have grown fairly quickly to 27 clinics throughout California, Southern California, as well as now in Northern California. So, Navid, it is great to have you with us today. Pleasure to have you. So Navid, you know, a lot of acquirers out there, right?

But how does Rise differentiate itself from some of the other acquirers that are currently in our industry? I think one of the biggest ways we set ourselves apart from the market is an ability to be agile. We don't have preconceived notions of structure, profitability, standardization in terms of acquisitions. Not to say that we don't have values and principles that we stick to, but I think one of the more unique things about our organization is that we're able to adapt to any acquisition or any target. We don't just have a cookie cutter mentality of things have to be done a certain way by a certain set of people and follow a certain program.

We really look at each opportunity uniquely and get a sense of what is the true value of this acquisition in terms of not only the practice but the value to our organization. And a lot of times we have an ability to be more creative in our structure whether that be with the type of deal or the type of terms or just the overall integration of the practice with our practice. We we've just generally demonstrated an ability to, you know, choose your own adventure for a seller.

And I think that gives us a leg up on the competition in terms of when we're, you know, when we're in a bidding war for a practice or if we're, you know, looking at a geographic area that has a high concentration of other buyers in the area. Sure. Sure. And you know that is it's a huge benefit because you know we often say that there's a lot of different structures out there but in many cases those different structures are each acquirer has a unique structure but they are pretty much locked into that structure.

So flexibility within a structure I think is going to bode well in this current market. So, push the clock forward a little bit. What are some of the unique benefits that a seller or a new partner might experience from now working with Rise? I think, you know, we we've been in this industry long enough to know candidly who really loves what they do and who's doing it for other reasons. I think I think for us one of the more unique things that we we've noticed is that I quite candidly as an organization don't love the actual M&A process.

I love everything that happens afterwards. I love the actual implementation, operations, tinkering, practice, growth, logistics, all of that. And I think a lot of times a lot of buyers don't quite like what happens afterwards and that shows on P&Ls or returns or you know the pressure from the different boards in terms of expectations. I think for us what we've really enjoyed is as soon as that transaction happens, as soon as pen comes to paper and that check clears, now what? And I think that now what is more important than getting to that point, writing a larger check or you know structuring a deal that you know one-sided or for the seller or the buyer.

I think for us if we fast forward and take a look at what makes us unique in terms of you know making these things successful is what we do afterwards. How we how we treat the practice, how we treat the people, and how we treat the opportunity. Yeah. Really interesting. You know, Navid, I'm sure you've been in this industry a fairly long time. I've probably been in this industry a lot longer. And so, you know, if you go back many years back to when I sold my company and, you know, my me and my partner sold our company, you know, it was it was a one-sizefits-all.

And it was all about the process, the process to get the business acquired. And while yes, there was certainly some, you know, care and attention that go went into the after life. You know, then this next generation of acquirers came along. You know, USP kind of at USPT at the forefront of that, but now you have many others that have grown to 800 plus clinics and they kind of brought that to a new level of focus on companies. But it sounds to me like you want to take that to a whole new level by again a big focus on the afterlife working with a partner.

Yeah, I think you know at the end of the day as practice owners or practice purchasers, I don't think we should be judged by the deal. I think we should be judged by what we do after the deal. I think, you know, anyone can write a check. Anyone can put pen to paper and write language in a contract, but what do you do afterwards? I think that that's how that's how we should be judged as an as an industry is, you know, how are we are we staying true to the things we said during the process?

Are we are we truly executing the vision that we implemented or that we that we saw throughout the systems or through the acquisition? And I think to me that's the only way to truly judge how you're doing is you know if the proof is in the pudding afterwards. Yeah. And with that alignment Naveiv, the return that ends up coming from that obviously the you know that comes second. But you know with that focus on that partner and you know making things great for that partner and that alignment that you guys have you know what comes after that is you know enormous returns for your financial partners.

So you know it all works. When you're looking at a potential acquisition, talk to me a little bit about what are the specific qualities you rise are looking for in a PT practice and some of the priorities that you have that relate to clinical, operational and financial aspects of the business. I think the biggest thing that we look for in terms of a practice is, you know, do we want to go to war with these people? Are they, you know, not just the practice owner and the seller, but the people in the practice?

Are they are they committed to the vision of the current practice and the future organization? Are they people that we want to, you know, be in a bunker with in terms of being in this industry and fighting reimbursements and all the other things that we have to fight through? So, that's probably the first thing we look for. You know, looking at clean, profitable practices are obviously, you know, top of mind, but sometimes you skew profit for value. And I think what we look for a lot of times is what's the value add to our organization in terms of not just a return on financial investment, but there may be strategic opportunities or there may be ancillary value that we can extract from an acquisition that we're really looking at.

So you know a great a great case example of that is looking at a practice and you know truly looking at a let's say a single location practice has referring providers as you know a set of financials and has a set of operations. Well we like to do a deeper dive in terms of would those referring providers or those relationships be able to add ancillary value to locations that we currently have. A lot of times that's hard to measure. You know, you can get a sense of do you have crossover, carryover in terms of that relationship, but sometimes that's just intangible value.

Are you able to open more doors to more people in the medical community that you can extract value for your organization, whether it be a existing location that we have or a planned future location or acquisition. So I think uniquely we focus on those intangible values a lot because we found that you can take a lot of that intangible value and make that show up on the P&L and in the financial return but if you're purely just head down in a spreadsheet a lot of times you know you're looking at it from you know maybe not the right lens in my opinion.

Yeah. So to me it sounds like you know it's about growth and a company or a practice as you said a single clinic practice that you see that the owner and the practice has is showing that intrinsic understanding of you know growth and the appetite for growth that that's going to be more appealing than a company that the owner's tired and kind of ready to step out. Would that be fair to say? Yeah, agree. And even in those scenarios where there is that, you know, that practice owner that's toward the end of their career or looking to kind of, you know, sail off into the sunset, a lot of times these practice owners, you know, to their to their credit, have done a great job of grooming that next generation of person, whether it's their second in command or their third in command, someone who's really almost in essence been chopping at the bit for an opportunity.

And I think sometimes this inflection point of an acquisition allows that person to really step up and you know move into a role that a lot of times they're under the shadow of a practice owner or somebody who's held that practice for a long time and they get to step out of that shadow and really you know shine their skills and their light. Sure. Yeah. We often say to owners who want to leave sooner than later. Take a step away from your practice and take a look back in now and how confident are you that without you showing up, you know, for the next three months that the practice is going to continue and actually continue to grow and if you don't see that, maybe there's some things, you know, you should start doing in preparation if you want to kind of, you know, walk away sooner than later.

So, let's kind of divert over to, you know, this industry right now. You know, it always seems as though in the in the physical therapy industry, small businesses think that they are, that the big businesses are immune to some of the challenges that face small businesses. But I think you're going to, report today that that's actually not the case. What are you seeing though as some of the key challenges that are facing small private physical therapy companies today? And how might these challenges impact their attractiveness for you guys for an acquisition candidate?

And how do you see then with your systems and structure maybe being able to lift a little bit there? Sure. I think, you know, the easy answer is always the mechanics of the industry, whether it be reimbursement and, you know, the payer mix and all of that. But I think we can all understand that may not be a beast that's ever really going to go away. Sometimes it'll be a larger beast, sometimes it'll be a smaller beast. But I think almost every practice owner that if you pulled a thousand practice owners today, a thousand out of a thousand right now would say that the people are the most difficult part right now.

Staffing and you know th those costs and those expenses and some of it quite candidly has been you know out of the control of a practice owner whether it be a small practice owner or a large practice owner. Some of it is, you know, our industry in essence shooting itself in the foot with, you know, acute care, skilled nursing in essence competing against outpatient for staffing and for cost structure and all of that based off of their profitability. So, I think it's an industry that's, you know, had a little bit has a little bit of infighting in terms of we're fighting for the same resources and that's people.

And I think that, you know, most outpatient practices right now are realizing that the people are the biggest value ad to any organization, but right now they're also probably the most, you know, in flux that it's been in a very long time in this industry, at least since I've been in there. So, I think for us, it's, you know, having very open and honest conversations with our people to say, "Hey, you know, the clinic down the street is going to make you an offer." And on surface that offer is going to look great, but a lot of times for us it's educating the details of that offer.

You know, there an extra $5 $10,000 a year sometimes isn't worth selling your soul. An extra $10 $15,000 a year doesn't, you know, doesn't equate to quality of life or care models or, you know, treatment protocols. So, a lot of it's education from our standpoint. And the other thing that we can do organizationally to kind of fight that is opportunity. I think in as we mentioned a lot of these larger, you know, national organizations have structures in place in terms of who gets to do what, who's allowed to be in what role, how leadership is determined and that.

We don't have that. We, you know, we've taken brand new PTs fresh out of school and put them as heads of new companies. And you know we really target people and you know don't target certain metrics in terms of whether it be experience or knowledge or something like that because sometimes you can sink or swim and for us I think if we're able to keep giving people opportunities within an organization that they're not going to get otherwise then now they can look at the industry as a whole or they can look at the opportunities presented to them and make an informed decision for themselves.

Yeah, for sure. I mean you are exactly right. People you know when you say people are the biggest problem in the industry today meaning you know lack of professionals as well as you know that stickiness within companies to get their staff to you know stay and you know be retained. You know the lot of talk about culture and but you know that's a big basket in itself. And you know what really drives that is sometimes I think a question mark. In fact I just read this morning I mean the number one peop the number one reason why a therapist will jump to another job is not yes salary is part of it but it's they don't like who they're working for.

They don't enjoy who they're working for their supervisor. They don't so you know getting to those people and getting that culture through a business seems to be you know when we talk to those companies they don't have quite as much problem you know retaining staff so yeah good stuff good stuff so what advice would you have for some of the small to midsize companies out there that want to try to increase their value preparing for a potential partnership with a larger for a company like Rise.

I think it's interesting because I have this conversation a lot with practice owners who are either, you know, fully committed to selling or in the process of making up their mind. I think I think in some aspects taking an objective look at your practice be it the practice itself, the financials, the operations are very important because you can you can make small tweaks to maximize profitability or your EBITDA or your multiple on the market. But I think sometimes practice owners get a little too enamored with that.

And I think there's always something that can be fixed or tweaked. And I think a lot of times there's that concept of let me hold on for another 3 months or let me hold on for another 6 months before I go to market. And that has its value. Don't get me wrong, we've all been there. But that also has its downside. You got to you got to weigh the risk of, you know, at some point, let's just start a conversation. And I think I think my biggest, you know, my biggest note to practice owners is be honest.

You have nothing to lose. You know, come out come out of the gate and say, "Hey, I'm probably not ready to sell this practice for another 3 months, but I'm willing to engage in a conversation with you right now to see if we're aligned while we get to that point while I keep cleaning things up and fixing things and all of that." Don't kick that can down the road because you never know what's going to happen. People people change, people come and go, industries uprooted, the world gets uprooted from time to time.

And you know, we experience international pandemics and all of that. And I think, you know, everyone can hold on for the perfect time or the perfect trailing 12 months, but that's never going to be there. I think just start the conversation have an honest open conversation and set expectations of timelines and you know expected value and see if you're aligned and then move forward with those conversations in mind rather than waiting for that perfect inflection point in time. Sure. Sure. Yeah. Because as you say, sometimes that inflection point does not meet when there are buyers with capital ready to buy and you know that three to six months while they may be improving the market could be declining somewhat and you know trying to predict that now I'm not sure anybody really can.

A lot of people are trying. But I think yeah, our advice to most companies out there today is that waiting is probably not the best decision if this is something you want to do in this calendar year or, you know, very soon thereafter. And I so I agree with you 100%. Also, what's the growth, you know, after the partnership? You know, how can we show that we're going to grow right kind of right through this, right, through a process, right, through a partnership. Because that can also be very attractive as well.

So I think I brought up e economic conditions. Walk me through how rise and the executives there and the private equity group. How has that impacted your strategy, your acquisition strategy? What opportunities and you know does this present for you as an acquirer based on what we have going on economically? Yeah, I think you know going back to the earlier point, I think there was a time in my career where, you know, Denovo was the only way to go in my in my opinion. You know, we held steadfast that, you know, bullishly we could do it better than anyone, faster than anyone with the people that we have.

And I think as you're as you're seeing that the resources are more scarce, you're retaining people for less period of time. You know, you have less longerlasting people because they're looking at the marketplace and they're looking at the field in terms of what their opportunities are. I think, you know, that's where M&A starts to come in and you say, okay, what's the what's the what's the time benefit analysis of denovo in an area versus an acquisition. And I think a lot of times more recently, acquisitions become a little bit more attractive because you're not fighting for those resources or you're not building it from scratch from the beginning.

You're buying into people, you're buying into operations and relationships. And so, you know, I think the economics of that have tended to gear a little bit more towards, okay, if we want to break into a new market or if we want to expand in our current market and acquisition becomes a little bit more palatable and even the even if the economics are not as favorable as they were a year ago or a year and a half ago with interest rates and things like that, the cost benefit of people and starting from scratch and time in this industry, you can outweigh that with an acquisition a lot of times.

So as we look ahead rest of 2023 2024 how do you see the economic conditions could impact you know for rise in terms of multiple pricing structures for private practices out there. It it's funny and I and I and I say this somewhat tug and cheek, but this is this is a great time for us because for from my perspective, this is the time where the rubber has kind of hit the road on a lot of the poor decisions that have been made historically over the last year or two in terms of I saw more tens in the last year or two than I saw in the last 10 years of my career.

I mean there were when money is free people throw around crazy multiples crazy valuations but now those investments and those people driving those investment funds are looking for the returns that they were expecting on those on those investments and they're not getting it. So the purse strings are getting a little tighter. The accountants are getting a little bit more involved and the lawyers are getting a little bit more involved and you know the practice owners or the business development people are having to answer for a lot of their you know their decisions over the last few years.

Whereas for us I think we you know we can come in and we can prove a track record of what we've done over the last few years and how that's how that's paid off for ourselves and for our financial backers. And that puts us in a unique position with sellers because we can come in and very candidly and very honestly say, "Hey, we have a track record of success, but we also have a lot of interest in continuing to move forward with you with solid foundational principles." I mean, you know, the concept, as I mentioned, you know, overpaying just to buy a practice is not a is not a philosophy that we have because we don't have expectations in terms of our financial backers of certain metrics to hit or certain numbers of clinics that we have to buy.

So, if we're if we're reaching those timestamps, you know, maybe we, you know, exaggerate an offer, we go above and beyond probably what of our what our principles tell us to pay for that practice. I think for us, we don't have those expectations. And I think that's why we love you know the partners that we have in this in this field in terms of financially and you know organizationally and the background that they don't have a quite structured expectation of return that some of these other private equity groups have because they have their trust and their belief in what we're doing and how we're strategizing our growth.

So we won't make crazy decisions. We'll make them principled but we'll make them based off opportunities that come our way. Yeah, great advice. You know, what I kind of pulled from that, you know, and for our audience is, you know, you talked about the tens and what impact that has had on these companies and yeah, if you run that out with the, you know, 10 plus multiples and what kind of growth needs to occur, etc., etc., etc., to get the return that the investors are expecting.

It's a tough road. And we've been part of some of those 10. So, you know, but at the same time, what I did not hear you say is that yes, those were incredibly high multiples, incredibly, you know, kind of off thechart great deals for sellers, but the industry is still at a point where there's really great deals out there. They may not be a 10, you know, maybe they're a nine or an eight, but that packaged with some equity down the road or some other opportunities, are still just really good, solid deals.

Would you agree with that? Absolutely. And I think that's where, you know, historically a lot of these high multiple deals, the selling point has been that second bite of the apple. And you know, a lot of these private equity, venture capital have proven track records of here's what the second bite looks like, here's what to expect as a practice owner. And so they've been able to make those types of offers because they have that, you know, that silver bullet in the in the background. And I think, you know, I think a lot of sellers should expect that, you know, a lot of these second iterations, third iterations of financial funds are still there.

Even even though money has tightened up, it hasn't gone away. So the money is still there in this industry for sellers to get great deals and it's up to them to determine who they want to be with in terms of that journey whether you know the value proposition is the deal currently as structured plus the promised second bite of the apple with the recap or other types of journeys where they go along with the ride and they're you know they're financially incentivized for different growth metrics or that second bite of the apple isn't quite as promised but they have different value ad that gives them financial security or financial upside that you know has a more of a blended multiple.

It's not the multiple you get on what you're getting right there. It's you analyze what the probability of that rollover you know second bite is that gives it to you there. Yeah, we call it waterfall. I'm sure your private equity fund calls that the waterfall analysis. And so yeah, that could be very promising for companies who were expecting that really high multiple. And as you said, you got a blend. You get this today, you get this down the road, and now you got that nice blend with the right partner.

Yeah. So walk me through a seller that made that decision for themselves to join the right partner, which was you guys. Obviously, if they chose you were the right partner. Certainly don't need to leave any names or where the market was. But walk me through kind of a recent successful acquisition and what made that successful. Yeah, you know, we have one in our backyard that we were pretty happy about. We had a seller that was just looking to, you know, get out, retire. It was time.

Single location practice. And funny enough, we had a location just down the street that we had just established. It was getting its legs and you know getting its footing in the in the community there. And we realized as we analyzed that practice that not only could we take our current fresh off the ground location and blend it with this acquisition and you know consolidate costs and consolidate expenses, but as I mentioned earlier, the ancillary value of a lot of the closest relationships that practice owner had tremendous value to several of our other 19 locations.

So, we were able to extrapolate what that relationship that seller had with, you know, their top referring doctor and that top referring doctor obviously believed in that practice and that seller, but only really had that one location to add value to. And now we were able to extrapolate that to six other locations surrounding that area. And I think that in and of itself, the success of, you know, taking something that number is not there on the P&L, that's not there on paper, but that's a that's an ancillary value that you can you can look at and say, "Hey, I really think that, you know, over the course of a month, 3 months, 6 months, 12 months, we build the right relationship with that referring doctor that believed in this practice that we're buying, we can take that and drive it to our other practices." And, you know, looking at different inflection points.

Well, okay, this practice that you're buying has X insuranceances and we have X plus five insuranceances. So now you go back to that referring doctor and say, "Hey, not only can we still serve all of these patients that we've been serving, but we know you take these other five that this old practice didn't take. Now we're able to really help you out and you know, you know, be a one-stop shop for you." So that level of thinking and that level of analysis has really proven, you know, strong for us as an organization.

Yeah. I mean that's when 1 plus 1 equals three, right? You know and for that seller that seller had tremendous value in bringing that one specific referral source. Primarily though for you guys may not have been a great value for a company that didn't have those other clinics that could immediately show you know their obviously their ability to serve his patients so or her patients. But yeah, no that what great synergies. What great synergies. So given the current dynamics, how are you guys kind of positioning yourselves for the future in this market?

It's funny. We, you know, we we're the smallest of the big bears right now. The way I view us, we're just above that level of being a, you know, a mom and pop local practice, but we're not quite a national player. We're not, you know, we're not competing with some of these larger massive publicly traded companies in terms of, you know, financial resources and ability. And I think how we positioned ourselves is that, you know, we're the same people that we were 5 years ago that we are now that we'll be in 10 years.

You're you're investing in us as people. So, we come in from day one and we're very honest about who we are, what our goals are, what our strategy is, and how the journey would look a lot different working with us than working with, you know, a different private equity or a national buyer. And, you know, for us in terms of positioning ourselves with, you know, the these sellers at the end of the day are making decisions on financials and they're making decisions on who they're going to deal with.

And I think, you know, while we may be able to compete on the financial side, the thing I have the greatest belief in our organization is that we can compete on the people side. You know, I have the utmost belief in, you know, my executive team, our directors, our leaders that, you know, we really sit down with these sellers and we get to know them and they get to know us. And, you know, we ask a lot more questions than we answer, but we allow the seller to ask the same questions.

We're we're not we're not afraid to show our faults. We're not afraid to demonstrate our shortcomings as an organization or the things that we're working on. And I think to compete against money, you have to, you know, show your cards. And I think we're really comfortable being who we are and telling practice owners, hey, this is who we are. These are the kind of people we are. And, you know, we're pts just like you. We're not we're not we're not private equity funds. We're not, you know, pur strings.

And we're not a bunch of lawyers sitting in a room making a decision. We're in the day-to-day grind just like you and you know we're we want to go to war with you if you want to make that decision to be with us rather than you know partnering with another organization and I think that bodess well for us now but I think it bodess even more for us in the future. Yeah. And you know, Na'vi, what I what I really hear you saying is that you've you guys have had some great success and you know, we have worked with you.

You know, obviously, you know, representing sellers and working, you know, bringing them to you guys. And you guys have done a great job, but what I'm hearing is as you continue to grow, you don't want that kind of home feeling and that private practice. You know culture to become a more of a corporate culture. You want to maintain and keep that very much people focused, patient focused culture. Am I accurate there? Absolutely. And I think the best example I can give is I think a lot of buyers in this market are very smart.

They have a they have a PT lead the charge. You know, they're the PT is the figure head. But if you take a look at their board, if you take a look at the decision makers, not all of them are PTs. And I'm not saying every single person in our decision-making organization is a PT. But if you look at our executive team, 95 plus% of them are PTs. And you know, we're very honest with people that, hey, we're PTs that are running a PT practice that have ancillary resources with, you know, people in the business side and people in the development side.

But I think that's where we differentiate is if you look at the, you know, the decision makers or the leadership teams on some of these other organizations that we're competing against, there's a PT there that's a figurehead and, you know, that that's the main point of contact. But if you look directly behind them, it's a bunch of business people. And I'm not discounting business people. They know business better than I ever will. But you know, we can speak we can look eye to eye with the PT and say, "Hey, we're one of you." And everyone with us is one of you as well.

Absolutely. Absolutely. Well, Nave, as I said, it has been a pleasure talking to you today. It has been a pleasure for Martin Healthcare Advisors to get to know you guys and I think that, you know, across the country a lot of people are going to get to know you guys a lot better over the next 6, 12, 18 months because you guys are just doing a great job. I also I really appreciate you coming on today with us. I think you've given a lot of value to our listeners and we wish you guys the best of luck in the future.

I appreciate it and I think candidly for our organization, you know, working with yourself and the people on your team has, you know, has been wonderful for us because not only do we do we deal with, as I mentioned before, kind of rational people that look at this industry the same way that we do, but, you know, you're dealing with good people that have their clients best interest in mind and are just looking to do what's right for this industry and not just for themselves or for one person or one side.

And I think that bodess well for the future for our organization and for yours. I think it's, you know, get enough good people in a room and great things will happen. Absolutely. Absolutely. So for all of you out there today, if you would have any questions for myself or Navid, please click below and let's talk again. Naveiv, thank you again for being with us today and I look forward to having you back on again in the future. Great. Thank you so much.

From the archive of The NEXTLEVEL Owner Podcast, Paul Martin's weekly show for physical therapy practice owners. Newer episodes are on YouTube, Spotify and Apple Podcasts.

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