Unconventional Opportunities In Today's Turbulent Market
The next guest in our Delphi interview series is Ajay Gupta, CEO of Physical Rehabilitation Network. Paul asks Ajay what unconventional opportunities he is seeing business owners take advantage of in this constantly evolving market, as well as the attributes that attract acquirers like him.
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 This is long anticipated and I am so excited to have with us AJ Gupta. AJ is the CEO of PRN Physical Rehabilitation Network and AJ has a long and decorated career as an executive in multiple healthc care companies finally now landing at PRN. PRN private equity-backed company based out of Frisco, Texas and they have currently have 30 unique brands over 200 clinics and they operate out of 17 states. AJ, great to have you with us today.
Thanks for having me, Paul. Look forward to the discussion today. So AJ, let's jump right in. Again, we are continuing on our Delphi series and as I said, I can't wait to hear your responses to some of these things and how you're seeing this maybe as compared to some of the other CEOs in the country. So again, we're excited to hear your p perspective on this. Let's start with kind of how you perceive the current trajectory of M&A in rehab and what you think are some of the key factors that are driving that trajectory.
So, it's been an interesting couple years, Paul, right? I think as we hit the pandemic, we clearly had a lot of different issues and concerns we were all thinking through and then kind of coming out of the pandemic in 21 was just a big year of M&A, right? So you saw a lot of a lot of great entrepreneurs, private practice look to align for different reasons with different companies in terms of just you know the next steps in terms of their overall business they develop. I think right now we've had a force slowdown, right?
Really just more related to not great assets and great entrepreneurs and local markets. Much more related to the economic conditions relative to the Fed, where we are from a cost of capital perspective. And you know, my view is just it's a timing thing a little bit like 2020, right? 23 is going to be was a force slowdown. Hopefully in 24 we see some easing on the Fed in terms of interest rates and what that can mean on the barn rate and we'll you know probably see a lot of great assets come back to market and start to capitalize on who they want to part partner with.
So I think it's an exciting time. It's it's kind of a unique year right it feels different in terms of M&A. But there's also a lot more opportunities to think about partnering with non-traditional PT companies. And what I mean by that is you've seen folks from Walgreens and CVS and Amazon and Walmart Health, right? Just to name a few of organizations that 10 years ago we would not have seen or thought about moving into healthcare services, right? And they've all made huge entry points in the primary care space.
And you know, your guess as good as mine, Paul? I mean, you know, is PT the next avenue when they think about valuebased models, retail access? How does primary care coexist with PT? I see a lot of overlap, a lot of opportunities given the value set of PT of how that could also position great assets and markets to align with some of these again non-traditional service delivery, right? Certainly in healthcare and different facets, but not as deep as they've gone in the past two years. Yeah.
So when you use the term assets, you know, you hear this a lot in baseball, professional football, you know, we're looking to build our assets. Give us a little bit more on what you kind of define as assets. Yeah, look, I think it assets more of a term of the clinic itself, right? There's a bricks and mortar assets. End of the day, it's all about the people, right? It's about the clinician, the founder, what the founder is looking for in terms of how they've created the culture and how they embody that practice, right?
The assets more of a I'd say more of a technical term of what's being acquired from an M&A perspective, not the actual individuals themselves. And you kind of described initially that those assets I don't know if you use this term, but it sounded like, you know, may not be performing quite as well as they had in maybe 21 and 22. Are you seeing that on the side of acquisition targets, but then in some cases those acquisition targets don't have the assets you need in terms of income flow, cash flow in order to trigger doing an acquisition.
Yeah, look, I I'd say 22, you know, we saw everyone saw healthc care aside, right? Saw a lot of changes in the labor market, right? Whether it was a great resignation or however we want to coin 22. So you know I think we've seen major rebound relative to that you know 22 experience in 23 where you have seen a return to workforce both on the clinical nonclinical front in talking to peers across the country you know many companies are experiencing you know same shore of growth that's you know consistent with historical perspectives and probably a greater degree of growth this year since last year was a soft year given some labor challenges depending on the geographies in which you live in right so I'd say quite the opposite right if we were having this conversation a year ago I'd say there was a softening and you know with Omicron coming back depending on where you reside in practice it could have been a challenge and then labor markets compounding that and I'd say this year has been a very different year so if you look at performance across the industry and even the public comps that report out you're seeing a general uptick and return more to normaly in terms of overall visits and performance for the industry which is great yeah which is very exciting to me. [clears throat] Yeah.
No, it's exciting feeling and kind of on the eve of private practice section conference and it's going to be really revealing talking to folks there and seeing how again you talk about staffing and performance. So, this is the million-dollar question or maybe you know for some companies out there the billion-dollar question but considering as you mentioned earlier the economic climate which has had a lot to do with what we would call definitely a slowdown in number of deals being done. What's your projection for the longevity of this?
How much longer is this going to continue? Yeah, it's a it's a question we all want solve for, right? So, look, I think we're moving into an election year, right, next year and no quicker way to lose a seat by moving into a recession, right? And and so, you know, my view, right, everyone has their own opinion is hopefully we see some rationalization, right? The indicators out there would say, you know, we've kind of been in a soft recession or this dialogue that's persisted longer than we'd all like.
I'd like to hope we see some easing from the Fed going into Q1, Q2 of next year, which really could help, you know, get folks thinking, right, those larger companies that, you know, cost of capital could come down from access to the debt markets and, hopefully we see a return to, you know, more deal activity coming into, call it Q2, Q3 of next year. So, that's my, you know, my hope on that front, right? In terms of what we've seen from force slowdown again talking to peers you know across the country I think there's desire to align with great entrepreneurs and p practices across the country I think it's just more of a capital access availability yeah really interesting and so you know deli analysts mark him down Q2 Q3 we're going to see that real uptick and you know what AJ I appreciate you putting yourself out there and actually giving us a quarter and you know, I think in our shop, sentiments are similar.
Now, if right now you're a business owner out there and you're looking to sell in this current somewhat downturn, what are some strategies that you might advocate on how they could strengthen that market position today? Yeah, look, I think it's just the core fundamentals, right? I think first and foremost, it's your employees, right? I mean as a buyer and a partner to founders across the country nothing more important than looking at the track record do you have a high turnover what's the nature of employees has there been longevity with your clinical group that shows a culture that folks want to be there right that's important right so I think first and foremost it's inward looking what are you doing to enhance the culture what are you doing further training for your employees what keeps them there what keeps them excited second is your core KPIs right everyone has different KPIs in which they manage their book of business boards and they should, right?
Some are very similar across the industry. Productivity, unit capture, payer mix, what are you doing to continue to try to attempt to get, you know, increase rates from payers, right? It's not easy in our industry. But you can also diversify your mix by focus more on work comp and other areas that could be created for the business. So, I'd say first employees, second your core fundamentals, and third is just, you know, how does your care work, right? How what's the NPS scores? What's your Google reviews look like?
What are patients saying? Are they coming back? Are they enjoying the experience? What are the physicians saying that referred to you? Are you getting consistency across your physician base? And so it's, you know, I'll call it core blocking tackling, right? Whether it's a downturn, upturn, any potential joint venture buyer is going to look to assess many of these attributes. And I think especially in a tight labor market, right, having you know, low turnover is going to be a critical area to consider and think about for anyone that's, you know, thinking about potentially coming out to market next year, thinking about coming out to market this year.
But I'd say it's just the core four walls operations are essential in this time period. Yeah. And I heard the C-word come out, I think even twice, that the culture, which you know, and the first thing that you brought to our attention was staff, culture, people, KPIs. Now, when you when you marry let's call it high performing staff or even happy staff, whether that's important or not to you or to anybody, and you marry that up with strong KPIs. And I heard that P word productivity.
How do you guys marry those two because in many cases out there, you know, productivity is you know, fear feared by some PTs out there. How do you keep that strong culture while driving productivity? Yeah, look, I think it's a reality that we're all having to face, right? I think we have been handed, you know, Medicare reductions in consecutive years. Been we've seen PTAs get decreased comp based off of it depends on the you know the state price of medicine but there is a decreased comp structure so we are facing compression on price at least from the government side Medicare specifically we are seeing increased labor wages in terms of expectations coming out of last year so I think it's you know how do you align there there's a lot of things you can do to build culture right I think that's on each individual entrepreneur private practice this organization of what's important to them, what that looks like, how you think about flexibility, how you think about work weeks, how you think about virtual care options, right?
There's a lot of things there that you can still maintain a productive workforce, create a flexible environment, also achieve the results you're looking for. I think financial alignment is important, too, right? So our model's, you know, a little bit different, Paul, where we joint venture with PTS and OT's and so they're aligned, they're vested, we really foster that to me, it's an essential private practice. And so if you're the owner or you're a Denovo partner, you're aligned in distributions, no different than if you were on your own as a private owner, right?
I think we're trying to align culture with ownership and also just allowing some flexibility with how folks want to devise and build out that local culture. To me, it's very local. Everything should be very local, not sort of corporate run. But also we're trying to be sustain a business over time with compression on reimbursement. Sure. Sure. Yeah. And the people challenge you know is certainly one of the more significant challenges moving forward as those you know salaries for professionals rise. And it sounds like what I'm hearing from you is creativity you know hitting them with lots of areas other than simply the productivity.
Yeah. What other challenges as well as opportunities do you see as if we look out now you know kind of over the next three to five years I'm sure you guys have that long look from PRN what are the challenges and opportunities yeah so let's start with the positive right I think this industry is resilient I think coming out of the pandemic the amount of even new entry points into PT right we've seen this whole digital movement from hinges and vor and swords and kayas, right?
So, there's this huge sort of interest in PT and doing it in a different manner. I think that's great for the industry, right? There's always going to be a spot for hands-on four walls physical therapy. There's an opportunity to grow the MSK sector in a virtual format, right? And most all of us had to move into virtual PT due to the pandemic. So, I think there's a greater opportunity to really help show the value of PT, right? And that's already happening. So I think through all the new entries that you know referenced even earlier with all the new sort of non-traditional folks coming into the sector.
So that's one right it gives a different breath. It gives it shows a value prop for a patient gives access in a different way than we may have had three four years ago. Second is you're seeing health systems really move into the sector coming out again don't want to keep talking about the pandemic but you're seeing health systems really recognize retailbased care how to think about community based care how to look at focus areas beyond ASC's and imaging and oncology you're seeing a heightened interest in physical therapy and what that could mean from an integrated delivery network right and they also recognize they don't do that great right most of their PT has been on campus medical office buildings hard parking in convenient locations on campus.
How do you align with great PT founders, operators, private practice operators, folks like Pure Nan to come in and really build out that model of care? And I see that as a huge opportunity to align with health systems that have investments across outpatient areas have aligned employed great physicians across primary care ortho neuro and you really create a strong MSA network with them. So to me those are you know huge opportunities technology we haven't touched on as much but the digital area AI who knows right that's an untapped area that we'll all look to understand better over time.
I think the more you can think about AI and how that can reduce sort of the administrative burden for a clinician, right, in terms of notes and if there's things you can do from an AI perspective to assist our clinicians that's going to allow them to be able to spend more time with the patient and less time note-taking into an EMR and everything else. So that that's, you know, it's interesting, right? You know, it's a little bit we're all learning what that can mean from an AI perspective.
You know challenges I you know I think it's you know more policy driven right now right it's it you know it's staggering to me why the PT area gets cut right we you know in terms of reimbursement we could argue we're already you know a low price point high value area relative to the you know betting the cost curve for healthcare especially surgery avoidance but that hasn't changed how our policy makers have kind of bundled PT into a you know reduction last few and even our proposed rule right now, right?
So, I think policy is sort of an unknown how that tracks out. I think we're having a recovery year when it comes to labor is still an unknown, right? I think we're still going to see a shortage of PTS over time. And how do we solve for that? How do we work with APA and others to bring more folks in reduce maybe this tenure of a doctoral degree may could assist, right? Is that is what's needed? You know, I don't know, right? I I'd say it takes longer for folks to get out.
Could you do different things to be traded on certifications to also complement the PTS? And so I'd say labor and policy are sort of the challenges that we've seen and I think that this will continue for the foreseeable future. Yeah. Yeah. You know, you mentioned health systems and if you have your two categories, challenges, opportunities, it appeared as though you put health systems as an opportunity. Do you believe that health system opportunities exist not only for PRNs and you know other large companies do those opportunities also exist for smaller more locally focused companies?
Absolutely 100%. And I've had dialogue with smaller companies that just happen to be strategically positioned in markets with health systems. Right. So just it really depends on what a entrepreneur is looking for, right? If you're in private practice, you've enjoyed the ability to create your own organization, your own company outside of the four walls of a hospital for a reason, right? I mean, retail outpatient care is very different on a hospital campus than it is on a private practice model. But yeah, I think it's you got to be patient, you got to be persistent.
Deals are not easily done. It takes sort of a mindset going into it to understand, you know, what's the value for you in your own PT company that you're looking to align with this health system and if they have a great brand, if they provide great opportunity for you to be their PT brand, then yeah, absolutely explore it. And I I've seen it happen, Paul. I continue to see it happen. It's great when you see a local entrepreneur really develop a good relationship, especially in smaller communities.
I'd say it's more prone than not. Yeah, absolutely. And and you know, going way back in my former business, we really got our start from a very small community hospital, not health system, little hospital. And but you know, then that model continued to work. I'm real anxious to hear a little bit more on the technology side. You know, there's kind of the challenge out there seems to be managing younger people who may think a little differently than some of us, let's call us more experienced people just have different views on what they're looking for.
But I heard you say AI and reducing notewriting time and again let let's keep that dive into the technology because you know again your background you know is not treating patients right I mean so you can really be helpful to this industry here where do you see technology actually solving some of the staffing issues that we have and making rehab better yeah look I first and foremost again to your point a noncl clinician I think there's a huge opportunity for a much more hybrid flexible patient experience right I think patients the last couple years you've seen a huge shift for consumer preference right you've seen folks be more remote from a workplace setting travel more less point A to point B from you know work to home so I think there's flexibility being driven by the consumer side of things right and not every patient is going to be the right patient for a virtual visit.
But I think being more open-minded to how to treat a patient through home much more automated home exercise programs, working with a virtual care model, we partner with folks like Lindberg and Hory Health both have unique offerings from how they go to market, what they're offering, and I think just kind of putting that into your overall ecosystem, right? And trying to think about how to bring in folks that have a best of breed solution and what that could mean for your practice and your provider setting.
And it's not it's one of those things you develop over time, right? I think it's getting comfortable and how do you move a patient and not limit that experience, right? If they saw you, Paul, in a in a clinic, from an inerson setting, how do you assure if you touched that patient from a virtual setting two days later because they're traveling to go see family, but they still want to maintain their second visit that week? And if it's not you available, Paul, and it's a virtual, you want that to be a seamless for the patient.
So, they feel like the coordination is very done, you know, just very seamless from their perspective. So, I think those are those are key things that the industry, you know, we're trying to figure out, right? We're certainly not, you know, leading or we're trying to really put that into our care model. And then also certain partners of ours will bring in have the ability to bring other specialists, right? Whether it's behavioral nutritionists and other care models that we don't offer today in our clinic setting, right?
Right. So, I think there's some, you know, advantages that you can kind of help a patient that could benefit from other specialties from a virtual sort of more of a care model, but really trying to be have that patient front and center. So, I think there's a care model piece, there's the, you know, the tech piece of advancing our EMRs and how we can make it just easier, right? I mean, things should be easy in this industry. We should have online scheduling, different just different functions, no different than a resi or open table where we can get a provider preference online to really make that patient experience more seamless than perhaps today more traditional phone calls in and trying to schedule, right?
Which is probably more the predominant way of doing things that's been that way for decades. And so there there's some blocking tackling I think could be hugely beneficial in that. Look, I I'm not an expert when it comes to chat GPT and bar and where these things might go, but I think we're all you're seeing a lot of interest, a lot of folks trying to adapt their care models as they understand that tech better and what that can mean for healthcare. Healthcare is usually a lag, right?
As you know, we usually catch up five to seven years, 10 years behind others when it comes to adopting technology and what that means internally. But I think we'll see more of an accelerated interest from providers looking to see how to, you know, think about AI and other tech areas to help their workflow. Yeah. And and I think and I don't know what you guys see, but you know, with younger folks that either were in college during the pandemic or had just gotten out of college during the pandemic, you know, they were able to non-physical therapist, many of them working remotely or coming in the office one or two days a week.
They're still doing that. And then they talk to their physical therapist friend who, you know, is back into an office five sometimes six days a week. So, you know, are you seeing that, you know, the shortage of physical therapies therapists could be because they're looking to just go in other directions where they can make the same amount of money, but they have much more flexibility. Yeah, look, I there there's it's been incredibly rewarding for me to be in PT. The nature of PTS, the desire to help patients out is like no other, especially I've ever been in.
So I think first and foremost, there's this drive to engage and provide care models. And I think, you know, pandemic aside, it's not changed. But I do think there's a desire for more flexible, more lifestyle. Especially those that might be newer in the workforce like you said coming out of either college or PT school and they kind of experienced it from their you know more their educational background and I think it's just providing that access right that's where companies like your end with size and scale we're in markets like Colorado where you could spend your winners then you go to San Diego and go surfing and if you wanted to go market like you know go watch the Cowboys even though I'm a I'm a commander fan so I think I think I think organizations of size that can adopt internal traveler-l like concepts and give you a flexible opportunity to experience different things through seasonalities and what might be more appropriate for where you want to be gives a lot of options right and I think we've adopted that we love the idea of bringing somebody in and giving an optionality to be across our 30 brands and different parts at different times of the year because I think that's what the workforce is wanting right and we're super supportive of that so I think you'll see we have seen and we'll continue to see how to adapt and how adapt quick enough to where the workforce is wanting and what folks are looking for in this time period.
Absolutely. Absolutely. So, if right now you're a private practice business owner and you're hesitant because of all the noise that you're hearing that you know to enter into the M&A space, what advice would you give to kind of ease their concerns? Yeah. Yes. That's that's a good one. Look, I think a few things. First and foremost, it's good time to think about what's important to you, right? I mean, I think we've all kind of rethought what's important in terms of time and horizon to do something.
What's important for the legacy you built? You put your time, energy, sweat, equity into building what you built. What do you want that to look like when you exit? Are you looking to just completely sell and leave the practice? Or is taking care of your employees and the culture what you built important. You have a number two that you would love for them to rise up, have a chance to have ownership, right? So, I think whatever that is, it's going to be unique for every individual and every owner, every co-owner in terms of what they're looking for.
So I think just this is a great time to just think about those characteristics because once you get in a process, you know, Paul, you're kind of in go mode and it's hard to like step back and make sure those top three to five things are kind of cataloged and you kind of know anyone you're talking to or potentially going to get into transaction that you keep those top of mind, right? So I think that's first and foremost. Second, a great time to just get your get your advisors together, right?
It's it's so critically important to have good legal guidance. Have an opportunity to work with the company like yourself, Paul, right? Or have great still have great accountant, right? And even if it's your family member that's been your accountant, let's just make sure that the books are put together, all the organization is there so that when you do think it's right and you're less hesitant because the marketplace is open back up, you're ready to go. You kind of have your trusted group of adviserss that can help guide you through the process because it takes time.
It's going to take a lot more time than you think. You're still practicing probably every day and you're also trying to help position your company for a sale process that's going to just absorb your nights and days in terms of how that looks and how that feels. There just do your homework, right? I mean there's a multitude of different organizations out there, right? Talk to your friends that have, you know, had the opportunity to sell their practices. What's that experience looked like? Not every, you know, was the process as transparent as they hoped?
Was was the story they got on the back end the same as what they were told on the front end? Right? It's a good time to just have dialogues, have dialogues with friendlies that you can have an open conversation with, learn, and, you know, spend time trying to see what companies out there. If it's a larger private equity backed company, a larger local privately held company embodies similar characteristics that you would be looking for your employees and your company that you built. So those are probably my best, you know, thinking right now, right?
But I mean, I think it's a good time to do the homework, spend the time thinking about it, right? Because the market will open back up. There's going to be a lot of interest for great, you know, great individuals, clinical assets, and it's how you prepare yourself for that process and that journey. You'll be hopefully in a better position to make a decision. Yeah, absolutely. And you know the first thing that you mentioned there was that introspective look which you know is really you know am I as a business owner as a physical therapist probably you know am I ready to move on to the next stage of my career?
Any additional advice you might give someone on how because many people find that hard to do. Don't know what questions they should be asking themselves. What do you find are some of those major questions introspectively that they need to have answered to feel like they're ready? Yeah, it's a that's a tough one, right? I think it it's so individual, right? And we've had just the huge benefit of partnering with great folks and a lot of times it's been their son or their daughter who was a husband wife kind of at the start of the practice that had risen up to also be a PT and they you know for certain individuals it was like well how do I position my son or daughter to also be an owner and continue legacy but also allow them to practice more and a lot of the administrative areas go to PRN and others that want to join venture model so I think it's I think it's knowing when you really want to retire, not be as active is important in terms of decision- making.
Once you sell your practice, if you go to a wholly singular brand, it just changes. It feels different, right? I mean, the look and feel changes from what you built. And it's not meant to disrespect what you built, right? If you're in a singular brand, I've been there prior to PT. It's just a an approach a larger company may take, right? And it's an important team, right? We've been again benefited from partnering with great entrepreneurs embody the private practice in many instances keeping their local brand.
It was important to them and just growing it right giving them scale on digital marketing sales other areas at a scale enterprise level to complement what they've built and take that legacy forward right so I think it's again it's going to be very individual but I think that's where you know talk to your colleagues right talk to your friends and even obviously Paul right I mean you have a lot of you know great organizations and entrepreneurs you've positioned over time right what was important to those folks and it's a good time to have those dialogues learn more and ultimately you got to decide what's important to you, right?
That's that really is an individual thing. Yeah, great advice. Great advice. I'm glad we dug deeper on that. Really good advice. Well AJ, you have given so much value to the folks listening today and I really appreciate your time today and we're going to bring you back for next series and probably the one after that. Wealth of information and I appreciate your time today. Thanks Paul. Really appreciate you and your team putting this together and all the best. Thanks for the time. Right. And so for any of you out there that have a question for myself or AJ, just click below. Let's talk. Thanks for joining us today. I look forward to talking to you in the very near future.
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