When Will This Turbulent Market Stabilize
Continuing our Delphi series, Paul welcomes back Michael Rucker, CEO of Ivy Rehab Network. Michael shares with us what his company has done to grow over the last few years and reveals his prediction for the future.
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 to have with us Michael Rucker. Michael is the CEO of Ivy Rehab Network and Ivy Rehab very fast growing company backed by private equity. They're based out of White Plains, New York, but they currently have 547 clinics in 14 states. Michael, it's great to have you with us today. Yeah. Hey, great to see you, Paul. And, looking forward to the conversation here. Yeah. So, Michael's going to weigh in today on what we're calling our Delphi series.
And the first three questions are going to be questions that we're going to really dissect, analyze as to kind of what's going on in this current rehab industry and the M&A landscape. So, Michael, let's jump in. You know, how are you looking at the current trajectory of where rehab M&A is going in this industry? And what do you think some of the very key factors that are driving that today? Yeah. So, Ivy, you know, as a part of the growth that you referenced or us scaling up at Ivy over the last six or seven years in a pretty consistent way, we've been a blend call it about 50% denovo growth and 50% u investment or acquisitions of new relationships and bringing new partners aboard to Ivy that way.
What I can tell you is that you know currently out there in the environment and I guess I'll take a just a quick step back Q3 and Q4 of last year there was a lot of uncertainty and a lot of change in terms of the demand for our services and we attribute a lot of that to inflation and gas prices and things that as Americans we all sort of lived through. I think you know kind of a hangover that existed with our supply of clinicians in the workforce and our ability to hire and rates of inflation that were much greater than we've experienced in the six or seven years prior to that.
And so some things changing and in the back half of last year there was some uncertainty. And from our perspective, things actually slowed down a bit at Ivy in the back half of last year because as an investor and as a buyer, you love things to be as certain, you know, as they can be. And you want to have that clear picture into what performance postinvestment will look like. And with a number of the moving variables that I just referenced, it was tough for us to feel great about writing checks and making investments in the back half of last year.
That said, we have actually seen things become more predictable return on some levels to sort of historical levels as it relates to rates of compensation for clinicians. Availability of non-licensed personnel that are critical to what we do. Overall rates of inflation. But the good news Paul is that I think that the other thing that we're experiencing I know the other thing that we're experiencing is that the demand for our services the fundamental you know outpatient therapy that our teammates across Ivy deliver and many others that a number of other you know outstanding organizations in this profession and industry what we're seeing has never been greater.
And so, we're excited about that. We're excited about the interest that riskbearing medical groups, big groups of primary care physicians and specialists, are demonstrating in applying, outpatient rehab services more readily as those services that everybody who's listening to this today and that, you know, you and I, Paul, spend time talking about offline. These services are so consistent with the triple aim in healthcare around you know wonderful patient experience high quality outcomes and low price points so I think that demand is going to be there and I think fundamentally we're seeing a healthier more consistent sort of performance of our practices and a real rebound from last year.
So, that leaves me pretty optimistic about, you know, what we're going to see. I I'll let you I've got one or two other comments, but please No, no. I was just going to comment on 50% of your growth being driven by startups, denovos. I mean, that that's remarkable. And it is so refreshing to hear. Because I think you know the analysts and the guys in our shop are also seeing that it's not as bad as a lot of the news is making it to be out there and so I'm just you know really glad to hear that.
I got to pin you down. You know we have had a downturn from last year. All right. Early last year where I mean we were seeing some things that we and I think what I'm hearing you say is that you're starting to feel you know now into 2023 here going into 24 that we might be heading back for an upturn. Is there a time frame for how long this kind of gloom and doom a little bit of gloom and doom that we're hearing and experiencing is going to be out there?
Do you have a time frame on that? You know, I think we, you know, we I met with my entire team, the top 25 leaders at Ivy yesterday and I'll see them again this afternoon and they're feeling, you know, relatively bullish about again the fundamental demand in the core at existing practices. And I think you know the conversations that we're having either with you and your team or directly with sellers leads me to believe that we will see you know an uptick as we get into sort of the middle to the end of the first quarter of next year.
And that's the way that you know our pipeline of investment opportunities and new partnerships. That's that's the way that looks. And I'd say one other thing. It's really important for a high growth organization like we have to continue to make strategic investments in new markets. We've got a terrific track record of landing and then expanding through denovo landing through investments in existing highquality practices with partners that want to stay involved. Landing there and then working with them as a capital partner, a thought partner as to how to grow their core on a number of levels and in a number of levels and I couldn't be more proud of our team's progress against that and track record there but also as we land in these new partnerships I can think of countless examples of just the rate of denovos that we're able to do with the local expert expertise that we secure from our partners is you know, a really attractive way for both us and partners who wind up rolling some of their ownership interest in their practice forward to, you know, really double down with the strength of, you know, in this case Ivy or a a new partner that allows them to continue their value creation, you know, journey.
Yeah. Yeah. No, that that's intriguing. You know, I' I've heard, you know, obviously there's, you know, I' I've heard the platform acquisition or there was one CEO that called it a beach head. But but Michael, what you have now brought to the rehab industry, and I don't know if it came from, you know, some of your previous, you know, work, but land and expand. That is that that's one that I got to take back to my team. They're going to they're going to There you go.
Yeah. There you go. Write write that down. But it's a great way to create value where you're bringing together a lot of the work that you and your team do, Paul, where we're making substantial investments and practices and then blending down that effective multiple because as you know that denovo expansion can be done in a highly economic way and that's a those are economics that we just love sharing with our partners in these new markets. Markets and so that's been a that's been a lot of fun to see unfold.
Yeah. And and I'm sure you've you know with low integration cost and high opportunity for growth, you essentially can pay a higher multiple, but if neither of those two factors are with a business, you know, your investors aren't going to let you invest. No, that's right. And and I'd say just also it's it is interesting because just the consistency of the results. I don't know that I said this, but we have made 60 investments over the last six and a half years or so in practices.
And I think with three exceptions that we've learned an awful lot from, we have dramatically outpaced our underwriting models. And again, you know, our partners have been able to enjoy in some of that outpaced performance. And you know, we're really, you know, continually looking for partners who are interested and open to our complimenting the beautiful businesses that they've developed oftentimes over many years. And we're looking for partners who are interested in complenting the broader, you know, the broader Ivy portfolio. Hey, one other quick thing here too that I do think we've got a we've got a handful of providers who have, you know, some of them have been in the headlines where they've been a bit distracted with sort of core fundamental issues in running their business that have dropped out of in a big way, you know, the pool of buyers.
This has been what we've experienced as we've talked with sellers. But there have been a couple of you know new entrance that have gotten you know busier and much more active as well. So those that combination of things also makes me believe that you know we're going to we're going to be back to you know historical levels here as we get into 2024. Yeah, you make a great point there because as you said, some of the longstanding companies have had to pull back just a little bit and we're calling them the new generation of acquirers, which there was a day that you guys were part of that new generation.
You're certainly not new generation anymore with over 500 clinics, but there is a new generation that is you know active and you know doing really great deals. Michael, what advice would you have for companies that are looking to sell? And I'm just going to call it in this current climate, I'm not going to call it the downturn because you don't feel like we're really in a big downturn now, but this current climate, what strategies would you advocate for them to strengthen their position in this current market?
Yeah. The the first thing I'd say is, you know, you probably know who there's a small set of organizations that you that you may be familiar with that you're friendly with that are at scale or you know, potential suitors for your business. Don't wait until 6 months before you're thinking that you're going to sell. That can lead to kind of fire drill and a lack of optimization and preparedness. I would encourage you to reach out to reach out to Paul and his team that have done you know hundreds of of transactions like this are specialists at helping you prepare for everything that you need to do to optimize things for you where you also you know certainly call Ivy but you know there may be one or two others that you know would the you know having lunch with us is free you know Paul and Tom and his team are willing to sit down with you any time to talk through like where are you going what's your time frame look like and what sorts of things might you be beginning to address or think about as it relates to optimization I' I'd add I'd add only this too one of the secrets to our high success rate with establishing really strong relationships with our partners that we've invested in has been partners who are interested in continuing to be active in the practice, you know, postc close or post partnership establishment.
That makes a big difference to how we think about things. And again, sort of talked about this at the top, but we love for there to be as little risk and as much certainty you know in the teams and in the investments and in the continuation of revenue streams and expense structures go forward. And we just really think that having a having an owner, having a seller, having an entrepreneur that's willing to continue to be involved in the business for some number of months or years, even better from our perspective is really ideal.
So again, I would I would offer only this suggestion that, you know, don't wait until you're, you know, 90 days out from wanting to retire. That could have an effect on the valuation of your business just because nobody knows your business, nobody knows your customers, nobody knows how to optimize things going forward the way that you do as the likely founder. Yeah. Yeah. And I think we've, you know, as acquirers and as consultants in this industry, we've learned from, you know, 20 years ago when companies acquire businesses and really did not believe that the owners you know, needed to make a contribution into the future, realizing that these are local businesses and local towns with local connections.
And now I think you know those like yourself and private equity investors behind have seen this and you know a lot of acquirers come to us and say you know it's going to have to be a really special deal if we're going to do one that the owners wants to leave you know in a in just a few months and you know kind of want to get out of dodge there. So and you guys have fostered you know the partnership model and with that partnership model it only makes sense to you know target those that are wanting to be partners.
Given the current landscape is there anything else specifically that you are looking for in some of your potential acquisitions today that may have been different from you know a year or two ago? Well, I mentioned this or brushed up against this a minute ago. If we've if we've got an entrepreneur and we've got a business owner that's particularly interested in making a contribution, you know, at Ivy that is, you know, more broad than local. We first want to do no harm, you know, locally to the practice.
We want to make sure that that's on a great set of rails. And so, you know, our entrepreneurs are and founders are paying real close attention to that. But we love it if people have, you know, a program or programs that would more broadly apply and make us stronger. And so we're looking at we're looking at wanting to enter relationships with sellers where, you know, they're interested in having a voice that's broader. 500 clinics is, you know, sounds like a lot and is a lot. But we work hard every day to make sure that we've got a small company orientation and feel and that we're doing a better job listening to the people on the front lines who know more than we'll ever know about, you know, what the most important factors are.
It's almost as though, you know, yes, you're selling your business but you're also growing. And I've seen, you know, with you guys especially, growth opportunities for people, for former owners, because, you know, a lot of operators who have operated a couple clinics have aspirations of advancing. And again, years ago and even currently, there's a lot of talk of that, but it it's rarely executed. And we've seen it executed, and we know you guys are executing on those. And I think that's that just opens up what opportunities there are in addition to I'm going to sell my business because I want to, you know, take this investment and liquidate it.
Yeah. And, you know, we love it. We've got we've got people in, you know, high level leadership positions who are former practice owners. So in some cases who have you know punched out in a really planful way of the day-to-day operations of their practice and stepped into big learning and development you know enterprise roles. We've got people who have stepped into business development roles that are broader. We've got people who have taken over other parts of you know a state that they're familiar with and so yeah clinical excellence roles.
It's it's a so it's been a ton of fun to see. And that that's something just one other point I' I'd suggest for anybody considering you know taking on some growth capital or selling all or part of the practice. You know what is it what sort of access can you get to existing partners who have been there and done that in referencing you know what has their experience been in integrating with a with a seller and I know Paul and Tom and the and the group at Martin are great at teeing that up but but again you know I think as a as a seller to the extent that you can get directly to people who have gone through what you're contemplating going through with that organization.
I think that's that's always helpful. Absolutely. Michael, in terms of technology, are you seeing any, you know, very recent technological advancements and does that impact the decisions that you make in this industry as you're out there looking for acquisitions? Yeah. So, at Ivy, we believe in a hybrid model. We think you know the traditional office or practice-based kind of bricks and mortar it will continue to be the vast majority of you know the model through which our services are provided. But we're proud of being a hybrid deliverer of of outpatient rehab.
We've got one of the most pronounced remote therapeutic monitoring programs in the country. So really proud of a group of individuals who have pointed that up for us. We also provide services in the home in a in a more limited set of markets today, but we do think that's important to to have as a as an offering and a and a third leg of the of the of the stool, if you will. So I don't know that I think about technology and that my team and I think about technology as interrupting or affecting in a big way what's going to happen with volumes of deals and M&A in our business over the next few years.
But but I do think I do think application of technology will continue to be important. Yeah. And you guys also have made a big investment in pediatrics and which you know 10 years ago you know acquirers were a little bit so yeah we applaud you for that. You know recently we've started a whole new division in ABA which I know you're familiar with as well and so yeah be anxious to talk to you more about that. So, if you're a private practice business owner out there and you're hesitant about entering this M&A space right now because of, you know, all the noise around you, what advice or insights would you offer as kind of a final offering because you've given some great ones already to kind of ease their concerns?
I think this may be a little redundant with something I said earlier in the context of one of the other discussion points, but I think to the extent that you can get a jump on things and that you're active in reaching out to Paul and his team, to get the process started before you think you need to get it started. It's just like anything else in life. Avoid any sort of a rush. G get a dialogue started. It's going to lead you to thoughts. It's going to lead you to other people to talk to.
It's going to lead you to a place where you're smarter about this process that most people don't go through more than once or twice in their, you know, careers. And so I think that would be the biggest takeaway. The the only other thing would be to be really thoughtful over time about thinking what is most important to you and what are you seeking to achieve in a transaction or an infusion of capital or selling all or part of your practice. There are economic objectives but then what are the non-economic objectives that you have that might involve career trajectory for your team?
It might involve being better than ever clinically in your practice, but what sort of things are you looking to be compleimemented by in the buyer or investor that you choose? So, those would be a couple of things I'd ask people to to be thinking about. Yeah. No, and great suggestions. And I think the conversations that folks can have PPS, you know, wherever it may be, will then lead them to, okay, now what do we want? What do we really want out of this? And I think that, you know, the economics is certainly a big part of that and financial planners can help you that, but what do you want from a partner?
What's the criteria by which you're going to utilize to evaluate the partners? And I think that I I'm hearing that loud and clear from you and I think it's great advice. And and then tie that tie that what do you want into some real deliberate sort of diligencing of the prospective buyer? Again, have they demonstrated a track record at enhancing clinical outcomes of the of the practices that they've invested in or advancing the careers or offering professional education that you know honestly isn't available today opportunities for your team.
So lots of different flavors and but I I' I'd I'd say again Paul we're bullish we've got a lot of momentum. I think I'm talking to other organizations that are that are seeing momentum being developed here and intend to finish strong over 23 and I look for good things I look for good things in 2024. Awesome. Awesome. Michael, as always, you have been phenomenal and have given our listeners just some really valuable information. And I really appreciate you taking part in this series. And we're going to although when we do our deli will not be specific to whom a lot of your points are going to be up in that deli and very wellreceived.
So again I appreciate your time today and we look forward to talking to you more in the future. That's great. Well, thanks for including me. A lot of fun to be with you Paul. And for all of you out there if any of you have a question for myself or Michael just click below and let's talk. And I appreciate your time today and look forward to talking to you in the very near future. Thank you.
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