Perception vs. Reality in the Rehab M&A Marketplace
Paul joins Allison Jones on the Therapy Matters podcast to separate perception from reality in today's rehab M&A market, covering interest rates, selective acquirers, and how owners should prepare.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good morning, good afternoon, and good evening, and welcome to the Therapy Matters podcast. Your one-stop resource for expert insights and advice on everything therapy and rehab. I'm your host, Allison Jones, and today I'm joined by Paul Martin, president of Martin Healthcare Advisors. Paul, thank you for joining me today. It's great to be with you, Allison, and I'm glad to be here. Awesome. So, Paul, before we dive into today's topic, I want to give our audience a little bit of background on who you are. So, take a minute to introduce yourself and tell us a little bit about your experience.
Sure. Sure. I'll be really brief, but I am a physical therapist by background. I have not treated a patient since 1993. But just very briefly, I started a practice called physical therapy and sports services in New Jersey back in 1989. Two partners joined me and the three of us grew that practice to 21 clinics. By 1996 and in 1996 we subsequently sold that practice to NovaCare who was our big competitor at the time. I actually got to spend three years on NovaCare's merger and acquisition team, which was a phenomenal experience.
And really that along with the acquisitions that we had done when I built our practice really got me enthused about starting a new company that would do just that for the rehabilitation industry. So in 1999 I started this company Martin Healthcare Advisors and I had gone out I'd kind of always looked at it as I want this to be a very boutique but very deep into the rehab industry group and we've grown our group to 12 of us all together. We have four physical therapist former owners that are now consultants.
We have three analysts. We have an investment banker that has been with me since 2007. And we now have added an ABA, applied behavior analysis professional to dive into that industry as well. And we have the greatest executive assistant known to man and Heather Martinelli. So again, this is just a great industry to be a part of. It's been a long exciting ride and I'm excited to talk about our topics for today. Yeah. So, so today's episode we're going to focus on mergers and acquisition activity.
And specifically we want to focus on perceptions versus reality. So, there's a perception that there's less M&A activity. That meltables are down and then the market is down generally. So, how accurate is that perception? You know, the perception I'm going to tell you what is new and improved, but the perception is actually very accurate. The market is down from 2021 and 2022 where we saw 145 or so transactions in 2021, 125 or so deals in 2022. Now 2023 started rather strong with two really large deals.
Confluent acquired Motion, Ivy Rehab acquired Excel, and then in the summer, JAG Physical Therapy acquired NYPT and Wellness. Year-to date through 2023, we have seen 49 transactions and based on the businesses that we are taking into the market, multiples have definitely regressed from 2021 and 2022. So, how would you describe the state of M&A today? You know, this is something that I think most people are not really aware of, but the market is definitely looking to turn and over the last four weeks, we have interviewed eight large company acquirer CEOs.
Our analysts are currently working very hard to re compile all these results in a deli analysis because we ask them all very clear questions about the market and about where it's going. Mhm. And again, what most private business owners don't realize is that all these acquirers are still doing deals, but they are being much more selective. You know, great companies, great sellers are still getting great deals. And the indust industry acquirers out there, they don't want to scare off great deals. And you know, again, just so I'm really clear, a great deal can be a onecl clinic company or it could be a 100 clinic company or anything there in between.
It's all about the performance of the company and its preparation. Can you dive a little bit more into what makes what makes it great? So you talked a little bit about performance. What indicates strong performance? Yeah, strong performance especially in the area of metrics, in the area of margin performance, financial margin performance. In the area of compliance, in the area of alignment of leaders in the company, looking not just to an acquisition and a sale, but through it and where they're headed as a team after they've been acquired and now with their new partner.
Versus a company whose financial information is in disarray and or cannot be updated on an monthly basis. Operations are not at the highest level of the industry, productivity is low, different areas like that. That's where we're looking at a good solid performing company. Okay, great. So, so tell me what's driving the negative perception that's in the market today? Yeah, that's a great question. And you know, I believe and we hear it a lot. It's a lot of chatter from the companies that are going into the market unprepared and acquirers in this current market with the cost of money, the cost of capital, the cost of debt, they're not no longer going to do these kind of special case deals.
They no longer have tolerance for delays that a transaction for someone who's not prepared, a delay that can occur. Again, kind of these special cases the lawyers dragging out the legal process because they really don't know you know the acquirers and how these acquirers need to respond to their lenders etc. So the you know the notp prepared kind of special case deals that somehow used to get through these companies no longer are these companies doing that. So I think you're hearing a lot of chatter from folks that have gone into the industry.
They're not prepared and so they're telling people up you know the acquirers don't want to do deals anymore. They all want to do deals. You sort of alluded to this. Interest rates are higher than they were a few years ago, meaning that money, as you said, isn't quite as cheap as it was. So, why are many companies nevertheless actively looking to buy physical therapy practices? Another great question. You know, look, interest rates are typically driven off the 10-year Treasury rate. So everybody's focusing, you know, I mean, these private equity groups and financial folks, they're focusing every day on where is that 10-year Treasury interest rate.
If you go back to 2020, the 10year Treasury interest rate was 0.5% as of August of 2020. That is what we call free money. Now, when money is free, I'm willing to take chances. I'm willing to take chances on deals that may not look as good, but we're going to fix them. So going back to that 2020, that's when it all kind of really started to drive. For any of you that bought a house back in 2020, you know that this is not a sustainable model going forward.
You know, e economically this is not something that can continue. So, we look at the 10-year Treasury note as of August of 2023, it was 4.25% comparing period to period. And you know, most would look at that and say it's not all that high, but that's nine times more than it was in 2020. And any of you that grew up in the 80s like I did when my parents were buying homes, September of 1981, the 10-year Treasury was 15.62, which would make borrowing rates for a home at like 1819%.
So, you know, yes, this has become a hit to the investors, especially those who were kind of just getting started in 2020, but the investors in this industry, those behind the private equity groups in this industry can still make an enormous margin and make a lot of money acquiring physical therapy practices and doing it well. You know, you know, I talk about this right now, but you know, yesterday the or two days ago, the fifth the 10-year Treasury was up to 4.8%. So this is a little rattling for the economy right now.
And most are predicting that this will start to come down at the end of 23 and we'll definitely or let's say we all hope it will come down into 2024. And again, this, you know, these interest rates, unless you have a privately held growth company that's borrowing a lot of debt, this is mo mostly on the acquirer side. It really doesn't hit the performance of a physical therapy practice. It's it's mainly on the acquirer side. Okay. So, there's still a lot of activity. It's just a little bit more selective in how they're approaching it.
Exactly. Yeah, there's still a lot of activity. You know, in any one single deal. We can have, you know, eight to 10 companies come in and make, you know, initial offers, you know, and then we keep pairing it down to, you know, the final one that gets the deal. But when we're taking companies that are, you know, kind of those great companies, which just means they're wellprepared. Does not mean they're huge. There's still a lot of acquirers. And there's some new acquirers that are really making a splash in the most recent three months here.
Excellent. So Paul, if you're a business owner that's looking to sell, what should you do in this economic climate to attract buyers? What are buyers looking for? F first and foremost, you have to be prepared. Okay? And you have to really know your business. One of the best ways to get to know your business inside and out is to have evaluation performed on your practice and really try to look inside. It's kind of the gears inside the watch. And you want to do this from somebody that is in the industry that has done valuations in the industry.
Okay? You really don't want to go to an outside accountant or a bank or you really want to have an industry professional do this valuation. And then in that valuation, you're also checking your preparedness for this market. Not for the market back in 2021, not for the market at the end of 20 or 22. This current market, you know, are your financials in a format that they can be updated as I said before every single month and show the real EPIDA. Again, that's the earnings before interest, taxes, depreciation, amateization.
That's the true cash flow of your company. That's what acquirers are buying. When there's, you know, some question marks about that EBITDA and whether or not it's real and there's some things going into that. Enormous amount of personal expenses, all kinds of one-time expenses that really aren't one-time expenses, that will really send an acquirer because they're going to see that as a delay full process, not a delayfree process. You know, how do your metrics visits per new patient, units per visit, cash per visit, visits per FTE, per therapist or per, you know, per professional?
How do they compare to the industry benchmarks? And do you have good solid reports that you can show this performance? Have you had a compliance review in the past 12 to 18 months? And what we are finding over and over and over again, I touched on it before, but are your leaders aligned? And do you have a plan for growth right through that acquisition? You're going to be joining us at TherapyCon coming up March of next year and you're going to be presenting on a similar topic.
Can you give us a preview of what you're going to be talking about? Absolutely. You know, first and foremost, we're going to have a lot more updated data. And folks will be able to look back at this and see if some of the predictions from all the CEOs that we talked about and our prediction, our analysts are also saying that this market's going to improve. Will it get back to the 21 and 22 levels? It may never get back there, but let me tell you something.
17, 18, and 19. We and others did a lot of really strong transactions. So, we're going to be updating on where we are because that that'll be 2024. And you know, the title is maximizing values in turbulent times, merger and acquisition and wealth building strategies for physical therapy practice owners. That that that's like the taboo, right? You know, we're clinicians. We're not here to build wealth. But we're going to be talking about how you can utilize your practice to build strong family wealth for your future.
And we're going to also offer up we're going to call actionable strategies that will enhance that bottom line, that cash flow, that EPIDA. And we're going to talk about how owners can look beyond simply managing clinical care, but managing beyond that clinical care. And that's how we find practices become very successful operationally and financially. They have that clinical focus, but they have the ability to look beyond their clinical care. And I'm excited to be a first-time speaker at your conference. Yeah, we're excited to have you.
And if folks that are tuning in want to join us at Therapy Con, it's it is going to be March 6th through the 8th, 2024. We're going to be in Las Vegas and you can find more information on the event at theapycon.com. So we hope you join us there. So, Paul, as we wrap up here, what are some final thoughts for folks that are listening in and thinking about, a, potential merger or acquisition? Yeah. Again, the idea about the market being down, the market is down.
The market is down. So, so we are correct. The perception that companies out there are no longer acquiring businesses. The perception that you know you can't have more than one company come to your single practice or your multi-practice. There will be multiple acquirers bidding on your practice. That's the perception that is false. There is still a lot of that in this industry and we're not seeing that coming to an end very soon. So, you know, if you're out there right now and this is a time that you're thinking that this might be a step you want to take or you want to take it in the future, as I said, start preparing right now.
Have that valuation done. Have that assessment done. Have someone take a very close look at your practice and what you need to be prepared for this market. It's been great talking to you guys. And Allison great to great to talk to you as well. Excellent. Paul, thank you so much for joining us today. We really appreciate your insights. We're looking forward to continuing the conversation out in Las Vegas at TherapyCon. Thank you to our audience for tuning in to the Therapy Matters podcast, your one-stop resource for expert insights and advice on everything therapy and rehab. We look forward to seeing you at the next episode. Thank you, Allison.
Want to talk about your own business?
Marlton, NJ 08053