How Long Will Market Turbulence Last? We Asked This Acquirer
In the latest episode of our continuing Delphi interview series, Paul welcomes back John Gallucci, CEO of JAG Physical Therapy. Paul asks about the current state of our market and when things might stabilize. Tune in to hear this acquirer's perspective on the future of our industry.
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. I will tell you today is one of the more crucial conversations we have had in a long time because I am so excited to have with us today John Gallucci. Now John is a physical therapist. He's an athletic trainer. He's an author and he is also the founder and CEO of JAG physical therapy. JAG is a private equity-backed physical therapy company based out of Bridgewater Township, New Jersey. They have grown to 140 clinics located in three states, New York, New Jersey, and Pennsylvania.
That's a mouthful and I can't wait to get to this interview. John, welcome. Thank you so much. I appreciate the opportunity to be here today. It's great to have you and I'm looking forward to your answers and how they're going to line up with the other CEOs in this industry. So let's jump in. Is that okay with you? Let's jump in. But my wife always says I don't really line up well. So we'll see what happens. All right. So John, there's a current trajectory in the M&A landscape right now in rehab.
What do you think are some of the key factors that's driving that current trajectory? So listen, we're as any business knows and anything in the M&A field understands, the more fragmented the industry, the more opportunity is for mergers and acquisitions. As we've seen the economic downturn, multiples are not as high in the sky as many of us believed we were worth. But if you look and compare us to other industries, our multiples are still above those. And let's face it, your business is worth based on what you've done in success of building your profitability, but it's also based on its visibility, its marketability, it's continuous of outcomes.
So when you look at the landscape of rehab and where we are, yeah, I mean economic downturn and borrowing money became much more expensive, which has maybe decreased the multiples, but our multiples are still higher than most other industries. So, if you're really considering an M&A opportunity and coming in relationship with a company that can afford you the opportunity to continue to grow and offer services in the community, I think that the landscape is still very advantageous for those in the in the rehab space more specifically the physical therapy space.
I think that the opportunities are still there. I think things are a little slower based on diligence. And that all comes to the economic downturn that people are definitely crossing their tees and dotting their eyes and making sure that things are panning out and I think our quality of earnings timelines have increased. But I think there's plenty of opportunity for those that have interest in jumping in the pool. You use an expression that kind of is sticking in my mind here and maybe it's sticking in the audience's mind here is that the multiples were high in the sky.
If they were high in the sky, when were they high in the sky and how far down have you seen them come? Are we down to ground level or are we still up in the clouds a little bit? Like where specifically have you seen these multiples come? That's a that's a that's a a dangerous question you just th out there. So listen, we as just being in America saw a tremendous influx of increased spending, decreased interest rates dramatically across the country in the last five or six years where private equity in every industry not just healthcare were had a lot of money.
They were looking to spend that money and ultimately because rehab was such a fragmented market, it had a big target on its back for financial institutions to jump in and jump in quick and compete against each other, which ultimately that competitiveness increased the multiples. Now, I'm a practicing physical therapist for 30 years. I've been in physical therapy offices since I'm 13 years old. You've been doing this a long time as well. There's none of us that ever thought when we opened up our doors that when we were going to eventually sell or eventually partner that we were going to get the multiples that were seen in the last three to four years.
We were very lucky. We you know the economics everything all the stars aligned is a best way to say it. Now we've come down to reality but our reality is still above the other industries. So let's take one of the biggest industries of our country. Let's look at retail. Think about retail in America right now. If you own a retail shop in America, you're talking about that if you wanted to join partner, sell, whatever it may do, merge, whatever it may do, you got to say to yourself, you're looking at a 2.5 to a 4.5 multiple of EBID.
And currently rehab is still sitting between five and 11 depending upon your demographic, your catchment area, depending upon the multiplicity of your practices and how many professionals you have employed. The problem you have is sometimes people that own one or two shops feel that their value should be as high as someone that owns 50 shops. And ultimately there's a lot that goes into it. Payer contracts go into it. So I think people have to understand that you're still getting a higher multiple that most industries mo higher than most industries but I think they have to take a step back and realize the last five or six years were a true anomaly and let's face it Paul you're doing this for a long time you love the last four or five years but ultimately we knew that wasn't the norm and we knew eventually there would be a break in the action so to speak to some sort of normaly.
Yeah, re really good point. And you know, you talked about borrowing. For the longest time, companies like yours, you're borrowing almost free money. Which then, as you also described, enables you to pay that higher multiple. But now we have some reality as it relates to the borrowing. And so with this prevailing as I'm saying the prevailing economic clim climate what's your projection for how long this downturn that we have had recent downturn how long is this going to go on before it turns around and comes back and begins to improve again you know I'm a student of multiple industries I try to look at all the industries not just healthcare although I'm a healthc care CEO I look at all the different industries and I think you know and we're actually you know waiting for this big Fed announcement right now and seeing where interest rates are going to go and are they going to hold right now but they've already told us that definitely by the end of the year there's going to be another increase.
So, so ultimately what's going to happen is, you know, you're going to see money continue to be difficult to borrow, but we are seeing a slowing down. And the predictors, and I look at all the different industries, are money is going to become less expensive probably by the third or fourth quarter of 2024. Now, is it going to be a massive downturn? No. But if we looked at the housing market, not that we're housing or real estate people, we were looking at 2.5 to 2.75 for 30-year mortgages.
Now you're looking at 75 to 7.75 for 30-year mortgages. Right now, the predictors in the real estate world are saying by the time they get to May or June next year, they're expecting to be under six again. So I think that's going to be the climate jumping into the third and fourth quarter of 2024 where we're going to see a leveling out and probably a decrease. And once money starts to be easier to borrow, you're going to see the trajectory kind of come back up where deals will get done quicker and more efficient.
Do I actually see us ever going back to the last four or five years? To be honest with you, I don't think we're going to see that in the next 10 years. You know, I'm definitely not your economic forecaster, but again, we were a lot of things kind of gelled and we were very lucky to see that in the M&A world. My opinion is you're going to go back to some sort of normaly of what you probably saw in 2015, 2016, 2014, 13. I think those are going to be more of your predictors than your 2017 to 2022.
I think that's a better predictor and I think that's where we'll end up falling. And let's face it, Equity Partners were doing a lot of business in 2014, 15, 16. So, it it's just that I think we have to come to the reality that economics have changed and we're not going to fall all the way backwards that quick. Yeah. No, great point. Great point. And so right now, if you're a business owner and you're looking to sell in this current climate, you know, whether some want to call it a downturn or a climate that's a little lower than where we were year or two ago, what are some of the strategies you might advocate on how they could strengthen their position in this market?
So the biggest thing is and most single owners or even if you you're looking at multiple ownership of four, five, six, seven locations, you know, everybody always looks at the one main thing. Am I making money? But they don't realize if you have one unit and you went to two units, can you still make money? Is your market marketing value, your PR value, your referral sources, your image in the community, is it that much of a factor? You know, used to be a saying we used to say 20 years ago, one hit wonder.
And I was a one- hit wonder. I opened up my first clinic and I was a one hit wonder. And the biggest thing is, can you replicate that? Can you get two clinics as successful as each other? And then can you get three? So first of all, I want to go backwards before we go forward. The opportunity for people considering selling is very advantageous right now. And the reason why it's advantageous is because what's happening at the Fed level when it comes to Medicare and Medicaid and cuts is followed by the other payers.
And ultimately the smaller companies are struggling to retain staffs and they're struggling to keep their margins where they were. So people are trying to figure out that balance. But remember something my grandfather always taught. As long as people are walking in and he had barber shops. As long as people are walking in the store, you could always keep the lights on. You'll always have food on the table. You'll always have a roof over your head. It comes down to that component of how much do you want to be doing?
Do you want to continue the HR troubles and trials and tribulations? Do you want to continue to fight with the payers each and every day? Do you want to be dealing with payroll issues? Do you want to be dealing with liability? I mean, look at where insurance has gone in the last five years. The insurance industry has been devastated by COVID, has been devastated by storms and different issues. And every industry is being affected for their makeup. I mean, think about right now healthcare. Health care is increased.
I mean, I could tell you and again, I don't mind sharing. You're talking about when you're renewing your health care. We're not talking about, hey, there's going to be a 2 to 3% cost of living increase. We're talking about practices that are getting 15, 20, 25, 30% increases in their healthcare. You've got 15 people, 15 staff members on your health care and all of a sudden that column goes up 30% in one year. It becomes it becomes tough and strength comes in numbers. And we've been very fortunate to find likeminded practitioners with outcomebased evidence-based concepts to come under our flag and see the vision of our demographic and catchment area.
And I think the opportunity across the United States for practice owners today to keep their vigilance of what they want to achieve but partner and grow with companies I think is very advantageous. And ultimately, you know, I do think the window is starting to shorten in the rehab component because I think the fragment component is starting to shrink. And you're my analytical data guy. So, I'm sure if you looked at it four years ago, the rehab market and how fragmented it's had to have shifted by at least 10 to 12% that it's less fragmented by at least 10 to 12% just in the last 3 to four years.
So, I think there's opportunity for people that are really considering this to really jump in the pool and learn. But I want them to understand what happened in the last four years is probably gone for the next 10 years. Reality's hit. And understand you're still going to do well and you're still going to be able to do what you love every day, which is treat patients and get people back in into living a lifestyle or their activities of daily living the way they should be. You gave a lot of kind of reasons why it could really make sense in this current market for someone who is has an interest in selling their business to kind of go into the market.
So for you guys, as you look at two very similar businesses, let's call them two, three location businesses, they're in different markets. What is there something specific that will take one of those businesses and you will look at them and take that as a higher priority to get that potential deal done compared to the next one? What's what's that one or two things in your mind that puts one practice and puts them to the top of the list? So, listen, Paul, you know me a long time.
I'm a people person. And passion drives success. And when you have two practices and let's call it three practices each, two companies, three practices each, and maybe their ibida is similar, the biggest thing you have to look at is what happens when they come under our flag. And we're working together and what synergies can they continue to drive to even improve on where they are. Sometimes practice owners plateau and never look at change and ultimately you could take two businesses that might be seeing the same volume.
They might be seeing the same revenue in EBITDA but ultimately you can always tease out the sustainability. Did somebody just ramp because they thought they would be wanted to get sold? And ultimately, if you look at the last 12 to 18 months, you'll see it was just a ramp. The other thing you see is people and again understand if you're thinking about selling, no matter who it's to, they have a team of experts, financial experts and legal experts, they're going to look at your trailing 12 months.
And if you decided to jump out of network just to increase your PPV for a six-month period, understand everybody's going to be jumping in network. It's it's where we are today. The industry has changed. You're either in network or unfortunately you're going to be you're going to be out of business probably in the next three to five years. There's not a month that goes by that we don't have practices that are out in network reaching out to us to come and help them. They went from making PPV that was crazy to to now making less than in network providers.
And the payers did that on purpose. The industry has changed because the payers didn't want to overpay for the service. The really good thing that we have going on and I don't know how far left we want to get out of the conversation is we are starting to see the federal government recognize the profession of physical therapy on an importance of one major factor. We get people better and we do it at a coste effective component. So I actually think that the APA and the APQI is going to help both the help the industry and help the patients get better access which I think is going to keep the longevity of the profession on a on a growth component.
I do think the schools need to catch up on reality. I think the academic institutions need to really understand what does America need as it pertains to rehabilitation and msk and I think they're starting to get it. I mean I've got a bunch of colleagues myself. We go out to different colleges and universities and meet with the directors and I think that gives our profession sustainability. But ultimately, I think if you're truly a practice looking to partner and or sell, this is still the time to do it.
And you mentioned you know, federal government, federal payer, etc. That they're starting to lean towards. Are are you thinking that lean and eventually we'll get to valuebased care? And if so, what will that look like in the rehab industry? So, I think we're, you know, it's funny, you and I have probably been talking about valuebased care for 20 years, but I think what's starting to happen based on research that we're finally getting in the right hands of the Congress people and the senators, and information. In fact, we've had we've had three senators visit JAG Physical Therapy in our three different states.
I know other colleagues of ours have had senators and Congress folks go in and out of their centers. They are now learning the physical therapy profession based on a cost-effective way of treating msk injuries and illness. And ultimately I think we will get to a valuebased care. But I also think we're going to be hopefully pulled out of this socalled health care is just going to get cut. I think that POT and hopefully speech will have their own designate and as we show the savings to the American people that the politicians will realize that we should not be lumped in all the all the so-called healthcare and you're seeing it.
Listen, we have always known it in the workman's comp world. We've always known it in the sport world, but in the global aspect of treating MSK injuries, everybody's starting to figure it out. And, and our biggest carrot was opioid utilization and abuse that put physical therapy at the forefront to say we treat pain, we decrease pain, we have the opportunity to get people in a pain-free lifestyle without medicine. So I think that's really what's gotten the politicians engaged which I think is enormous for our profession.
Absolutely. Absolutely. So what other things are you seeing in terms of technological advancements and is that impacting m your M&A decisions at all in the current industry? So as we know every industry across the world has become data driven. Ultimately we've you know your human resources is data driven your finances is data driven your whole component of recruiting development of people retention even our marketing is all data driven. Our catchment areas are all data driven. Ultimately the biggest the biggest win for us is the opportunity to share that intelligence with people that want to join us.
And ultimately where you may as we go back in conversation look at that plateau practice that plateau practice may be because the catchment area has totally change their payments. We now have that data and stats to go in there and say hey listen this was your payer mix. This is why you've plateaued and now if we do this and you were to come under our flag you're going to have an opportunity to increase revenue to that practice so come and join us as a partner and you'll see the benefit ultimately yes I think analytics and data is definitely driving greater opportunity of success in the rehab market but I want to make sure people know that we as clinicians always looked at data as either research, evidence-based or outcome.
We now have opportunities to drive business decisions based on analytical data. So, us as clinicians want the outcome studies and the outcome data, but as business people, we want to know what's truly going on in the demographics. We want to know what's going on in the hirings. We want to know what's going on in your resources in the community. I mean, think about it. And I don't want to use a date, but let's say 20 years ago when you first opened your first practice, Paul, I think it might have been a couple of years before that, but if you knew how to be able to extrapolate every referral source in your community and be able to target that referral source in less than 30 days, think about your growth trajectory of how successful your original practice would have been.
And unfortunately, smaller companies can't afford some of this technology. It's just way too expensive. Yeah. As PT, ATC, you know, so very clinically minded. And every time I talk to you, it's it appears as though you have stayed clinically minded. Do you see technology, AI at any point in time influencing clinical decision- making? I think, listen, we always need we always need people treating people. That's been my philosophy forever. I think technology is definitely an assistance to the licensed practitioners. I think there's things that we're going to see grow in the next 5, 10, 15 years.
As look what we saw with COVID and taotherapy and being able to do things like that. A lot of the digital platforms are trying to do too much too quick and you've seen major corporations deviate away from the expenses that they were spending on it. I was in a project here in the Northeast with probably one of the biggest corporations in the United States and for two years I was on this think tank and there wasn't a meeting that we were having meetings once a month and every meeting I'd go to and say you can't remove a physical therapist from physical therapy.
That's the whole rationale of people treating people and motivating people and I don't think we'll ever lose that. So, I definitely think technology aids in the progression of care, but I don't think we'll ever lose that we are people treating people component. Yeah. Absolutely. Amen. Amen. So John, I'm going to end with this. For private physical therapy business owners out there and they're hearing from their friends and neighbors, huh, hold on. You don't want to go into the M&A space. What advice or insights would you offer?
And you've offered a number of them, but what would be your final insight that you would offer to kind of ease their concerns? Well, listen, you know, I'm shy, so my first thing would be pick up my book, The JAG Method. It's a 30 minute read to entrepreneurial success. So, that's the first thing. On the second thing would be a component that listen the marketplace if you're truly thinking about coming under another flag partnering with somebody doing a merger or even just selling the opportunity is still there and you should definitely jump in the pool.
They should hire you to work with them and show them the path to truly getting a good merger or sale process going. Again, I think that people were intimidated on something that was an anomaly. The anomaly is now gone and we're back to normaly. And if you go back again, you could go back to the 80s, the 90s, the 2000s, and you'll see a 30-year trajectory that multiples sat within reason. What we saw the last four or five years is probably gone for a good 10 years.
But if you're interested in the sustainability of truly giving physical therapy to the community you're in, you should you should work with someone and partner up and collaborate and you'll see that the opportunity to be sustainable and have a more of a runway of longevity will be more fruitful to your overall career. Absolutely, John. Very, very well put. Hey th this has been awesome and you have given our listeners today an enormous amount of information. And I really appreciate you taking the time and I really appreciate your candidness and if you want to know something, you just ask and you're going to give it right back.
Well, thank you so much for the opportunity. This was great. So, for any of you out there that have a question for myself or John Gallucci, click below. Let's talk. Thanks and have a great day.
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