What This Acquirer Sees Just Over The Horizon
As we resume our Delphi interview series, Paul welcomes Rick Douglass, President of Operations at FYZICAL Therapy and Balance Centers, to share his prediction about what the rehab M&A marketplace will look like in the very near 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. Real excited today to have a new guest on this show. We have with us today Rick Douglass. And Rick is the president of franchise operations for physical therapy and physical, not physical therapy and balance centers. Rick's a physical therapist. He is the former owner of Douglas Orthopedic and Spine Rehabilitation. That is still on the west coast of Florida as one of the physical franchise locations. And physical is a physical therapy franchise with 534 franchise locations.
I feel like it was only I know it was more than a few years ago, but when I got that first call that in Florida you were starting physical franchises. Also, 60 of those franchises are actually physicalowned therapy clinics. Hey Rick, it's great to have you with us today. Yeah, great to be here Paul. So Rick, let's jump right in. You know, we're doing this Delphi analysis and we're really anxious to hear your perspective on some of these key questions that we're asking CEOs as well as operations directors and thought leaders across the country.
So Rick, how do you perceive kind of this current trajectory of the merger and acquisition landscape in rehab? And what do you think are some of the key factors that are driving this current trajectory? You know, Paul, I do believe that we will continue to see the merger and acquisition activity increase and really in the terms of the consolidations and so you know so many of the larger players in the industry are continuing to scale and grow by acquisition and I think some of the factors that really drive that you know coming out of the COVID environment and some of the obvious challenges that we all faced during that time clinicians, you know, single unit practice owners are looking for, you know, their alternatives and their exit strategy and many of them are, you know, looking to some of our larger organizations for acquisition.
You know, we see the challenges with declining reimbursement and increasing costs and many of them would really look for the opportunity to be part of a larger system that provides a bit more comfort and confidence to those smaller unit single-unit operators. So Rick, what I hear you saying, you know, the numbers show that, you know, numbers of transactions are down. Monies invested is down this year. But what I hear you saying, and I just want to make sure this is clear, that although these numbers are showing us that the industry is down, you're seeing that there are still a lot of acquirers out there acquiring, including physical and that there are still a number of companies that are looking to join a larger entity.
Is did I hear you right? Absolutely. I think you know many of the players that I speak with as they are setting their strategic plans for 2024 and beyond a lot of it is based on growth by acquisition and I think some of the downturn in the recent times is associated with the postcoid environment. So people saw their EBITDA, their profit margins decline significantly and they are now working to position their clinics to regain that equity to regain those profit margins and establish their clinics at evaluation that you know helps them to recover from the co environment but also see a return for all of their investment that they've done over the you know the last several years prior to co and as they get back to those pre-COVID numbers in terms of you know, revenue and profitability.
I do believe that they're going to be looking to exit. So, if we look at all the things going on economically now, higher interest rates, inflation rates really high, cost of physical therapists has, you know, skyrocketed. So, we have a lot of things going against us. Let's call it the prevailing economic client. What's your projection for how long this downturn will hold on before it starts I mean it seems like you're sensing things now but when would you say this is really going to start turning more positive you know the one thing that we've seen that's limited our 534 locations ability to grow has been in the hiring and staffing recruitment and retention of physical therapists again coming through the postcoid environment has been challenging and I think that's the thing that's inhibited or limited our growth.
We do know that at the last quarter of 2021 there were 22,000 physical therapists who left the industry altogether and we just haven't recovered from that yet. And I think as we graduate 12, 14, 15,000 new physical therapists every year in the coming years, as is projected, you'll start to see those vacancies begin to fill and clinics will be able to grow again as the staffing levels return back to the to more of the normal levels that we anticipate. And so g give me a give me a quarter or a date that you're going to pin that on so I so I can get your final answer on our second deli question.
When do you think this is going to start turning much more positive? I really think by the time we get into quarter four of next year, a lot of the heavy hiring challenges will be alleviated. We're going to see, you know, again, in our industry, as you well know, it's always been a challenge to hire to for growth, but I think we'll see it go back to more normal levels as we get into quarter four. And the downturn in M&A activity, when do you see that turning more positive?
I think it'll probably follow in the following quarter. So, we get into, you know, quarter one of 2025. And if we see the interest rates eventually kind of return back to normal and people become less averse to, you know, taking on a level of debt with the with the interest rates, I think that's when we'll really see it start to pick up. And the other piece of it is those clinics that would like to sell, they do they're going to be working as they are able to staff and grow.
They're going to be working to improve their EBITDA margins and make themselves more attractive for purchase. So our trajectory is starting to get more positive, but you think it'll get significantly positive towards the end of 24 and into 25? Yes. All right. All right. So, if you could give advice to a business owner out there that's looking to sell in this current climate, this, you know, somewhat downturn, what are some of the strategies that you would advocate that would strengthen their market position? You know, it really is making sure that you understand the valuation and you know, everybody believes that their clinic is worth x amount and it and it you know, a lot of it that belief comes from the number of years that they've worked and you know, blood, sweat, and tears and growing their practice and what they bring to the community.
But at the end of the day, it really does come down to EBITDA margins and multiples of those EBITDA margins in terms of your valuations. And so a lot of what we've seen at physical is when we talk with potential acquisitions, you know, they're challenged by the valuation relative to not really having a good understanding of how that is calculated. And so for any practice owner out there who is looking to sell, my advice would be to really educate yourself on the merger and acquisition. I know you put out a lot of great information relative to that and have a good understanding of what that looks like and then work to position your clinic to be established for acquisition if that's your goal.
That means that you're going to do everything you can to be sure that your metrics, what we call our vital statistics and pillars of success are aligned so that you can see those profit margins and that you can get the multiples that you deserve in your practices. So I think what I hear you saying is that most physical therap or just most business owners in general think their business is worth more than it may be once you put it into the market and so they should educate themselves before that to make sure that they're not wasting their time as well as acquirers time.
Is that what I hear you saying? Absolutely. And you know you don't also don't want to be surprised. You know, you want to be able to establish your a good understanding of the value of your practice so that when you do look for acquisitions, you don't go through a process of LOI and due diligence and then eventually come up to a number that you know that you're surprised by. And sure, yeah, there's plenty of information out there to educate yourself and then if your goal is to sell, you can work over the course, you know, set yourself the appropriate goals over each quarter to set yourself up for the valuation that you believe you deserve.
Absolutely. Absolutely. So you talked about the staffing challenge and I think yeah we also are seeing that from a lot of our clients. What other challenges as well as opportunities do you see in this space you know let's look one three five years out you know into the future. You know, challenges. Obviously, we continue to see pressure from all of the payers to reduce reimbursement. And that includes Medicare as well. So, being advocates on our own behalf and really working on establishing the value of the physical therapy visit in your own clinic and going directly to the consumers and educating them on the value of that practice.
There was I'm sure you've seen the recent value of PT study that just came out from the published by the APA. I think we all need to utilize that tool to be sure that the public is aware of our value and how much in cost savings we can provide as physical therapists, not only to the individual, but to the health care as a whole. I think that's a huge challenge and opportunity in and of itself. The nice thing that we've encountered is that the demand for our services, I believe, has never been higher.
You know, I've been in this industry now for 30 plus years, and the demand for physical therapy services across our system has never been higher than it is. I mean, there's a great recognition on from our referral sources as well. So, I think we can continue to, you know, get on the soap box and beat that drum. Is a great opportunity. I think we talked about it a little bit in the education and training of the practice owner the utilization of business intelligence and analytics to really run and drive your business.
You know, measuring everything in your practice that can u is associated not only with your value but with great patient outcomes. With the ease now of gathering and manipulating data electronically and utilizing that data to help grow your business and improve your outcomes. That's a huge opportunity for us. Yeah. Yeah. You know, you talked about two things there. You talked about huge demand and we've also talked about shortage of physical therapists. How do we bridge that gap? I I'm not sure we bridge it just by hoping that more students go to physical therapy school.
Are there other ways that you and physical are trying to bridge that gap? You know, there's a lot of recognition in the utilization of physical therapist assistants and doctors of physical therapy becoming owners and managers of a case load and leaders of a clinical team to help improve patient access to care. I think that's a vital import part of what we can do to meet that demand. Obviously, because the demand is so high, we don't want anybody else to slide in and start offering the you know to meet that demand.
We need as physical the as the physical therapy industry to be the experts in the field that are providing that care. So being creative with your scheduling, utilizing our great physical therapist assistants across the industry, and really as doctors of physical therapy, taking ownership in that case load and in the clinical leadership is a big piece of it. Yeah. I'm curious any types of physicians and or other types of therapists out there who are kind of swooping in and pulling the physical therapy patients away that you've seen.
I mean the perfect example is in some of the stretch lab and stretch zones and you know these are non-licensed personnel that many of our patients who would love to come to physical therapy but don't want to wait four to six weeks for their visits. They're going to go sign up for you know a subscription to one of those facilities and obviously there's no real evaluation done. The standard of care is significantly less and so you know that's our challenge as an industry is to be sure that we're you know meeting the needs of our patients.
I think some other opportunities with technology and remote therapeutic monitoring and doing virtual visits is also another way that we can be sure that again we're selling the value of physical therapy and we're letting the community know that you know we are the experts in muscularkeeletal care. Absolutely. Absolutely. You've talked a lot about technology and you know using that technology to whether it's to achieve better outcomes or achieve better processes. Anything more on that? I'd love to hear. I know physical is on the cutting edge of you know balance as well as all other kinds of therapies.
Anything else that you're seeing or that you might recommend for private practices? You know, in our centers, we utilize computerized postural dynamog dynamography to, you know, evaluate and treat patients and then track their progress through the physical balance paradigm as they go through their treatment. And so being able to have a patient, show them what their baseline numbers are, compare those to norms, and then track that progress as they go through their treatment visits, and then communicate their improvements to both them and to the referral sources is a big piece of it.
And then really from, you know, we talked about declining reimbursement and increasing costs, but utilization of the technology to improve your clinical efficiency with documentation, billing and coding, all of those things. The less time we have to spend on those administrative tasks, the more time we can focus on treating our patients, the better. So, being sure that we're optimizing all of those tools is a big piece of it as well. You know, I think there's a perception out there that patients don't really want to look at numbers.
You know, they're patients. They're just patients. They're they just want to walk better or feel better or whatever it might feel better is a better thing. How do you find that your patients respond when they're shown actual data and numbers on their improvements? You know, for me, it's always about the transparency and then the education. And patient education is obviously a big part of what we do. But I believe that if you sit down and have that conversation with the patient and take the time to say, "Look, this is the this is your baseline measure.
These are the things that I think that we need to do to improve on this. Each time that you come in, we're going to go through an advancement of your treatment session so that you're not going to be repeating the same tasks each time you come in. You're selling again the value of each of every single visit for to that patient, letting them have a good understanding of what it is you're going to do on each visit. And if you have an, you know, some a PT assistant, you're introducing that individual, letting them know their role in that patient's care.
So, your care team can be a vital part of that. I think I've and I found that the patients respond very well when they have an understanding. And so doing that education early on and then continuing at each step of the way and then celebrating when they achieved their goals and letting look, yeah, you've hit this, you're above benchmark now. Yeah. Yeah. Be a big piece of it. Yeah. That's awesome. That's awesome. Also takes focus away from the pain, you know, if that's what they're there for.
We take the focus away from that and focus more on their function and their ability to do the things that they want to do. I think that's where the wins come in. Sure. Sure. I'll tell you what, if we're back to now using numbers in physical therapy treatment, I want to go back in and treat some patients. That sounds that sounds interesting. You know, one thing that I wanted to touch on, is, you know, physical a franchise company and wow, you guys have just done a phenomenal job at on the franchise side and now also on the, you know, one of the acquirers out there in the industry.
As an acquirer, is there anything unique that you guys are now looking for in companies that you didn't look for maybe before this downturn? You know, different in 23 than it was in 21,2. I tell all of our franchises who are looking to grow by acquisition that one of the best opportunities is an acquisition of talent. And so, again, advice for a franchise owner or for a clinic owner that might be looking to sell, one of the things we look for when we make an acquisition is, are we going to be able to acquire a talented team, that wants to work with us and continue to grow with us into that in that center?
That is much more attractive to us than somebody who wants to sell, but also wants to retire at the same time. You know, we need great leaders and managers in our facilities. And you know, if we can acquire talent, that makes it all the more attractive. I I'm curious talent g give me give me a definition of when you see a clinic that has talent written all over it. What are some of the specifics that you guys see because that that's really interesting, right? I mean, it's a physical therapist, physical therapist assistant, or a care team that can create raving fans in their patients and their referral sources.
If you've got if you've grown your business that way, that is your biggest strength. That is that is why we would want to acquire you and obviously that team would we would want that team to stay. They're the reason that clinic has been successful. Absolutely. Yeah. So, final answer for physical therapy business owners who are out there and they're like, "Ah, I don't know if I want to go into the M&A world right now." What advice or insights would you offer to kind of ease these concerns that they have?
I think as a prior practice owner myself, I had two locations that I ran for 15 years independently and then converted into physical therapy and balance centers as a franchisee before selling those to the clinics. The opportunity, you know, the one thing that I always thought was my best opportunity in my clinic was to see more patients. What being acquired allowed me to do was to step out of the daily grind of seeing patients all day every day and actually focus on the growth of my business.
And so for anybody out there who is looking to get involved in the merger acquisition, think of it as a great opportunity to grow. You know, access to time and access to capital are the two biggest things that physical therapists just don't typically have in the small private practice. Partnering with a large company like physical or anyone else out there gives you that access to time and access to capital to grow and growth means we take better pair better care of our patients and clients in the community.
You're bringing up two too many great things to stop now. I got one more thing for you. So you were running a two clinic business. Obviously doing a nice job. Physical was interested and came along to franchise that and now actually owns those businesses. Now you're the president of franchise operations for all of physical. This is something that can really happen. Can can you walk through how you went from just a rather small physical therapy business owner that was acquired to now you know a sea level with physical you know Paul I've always been a student whether I'm trying to become the best physical therapist I could be with as an OCS and a fellow in the American Academy of Orthopedic Manual Therapy.
I took that same just interest in continuing to improve into becoming a student of leadership. And I had a lot of great mentors along the way, both on the franchising side and in the physical therapy industry and healthcare overall. It was just that desire that led me to be able to continue to grow that and really, you know, early on creating, you know, creating an enhanced vision for where I wanted to be. This wasn't ex certainly wasn't exactly where I thought I would end up, but I had an enhanced vision of, you know, joining like-minded physical therapists in the growth of a larger industry and being able to, you know, collaborate with other individuals and really, you know, it always comes down to putting the patient first.
Yeah, it's exciting and congratulations and you know I think that's a great story for again physical therapy business owners out there who you know think someday maybe they'll be you know a director of operations for one of these large companies. Fascinating Rick. I hope you enjoyed this time with us today because we're going to bring you back for some other topics that we're going to do. We have just great topics that we run through. I know this was your first time through, but this has been an just an awesome interaction.
And I really appreciate you giving our listeners today some really cool and valuable information. Well, thank you very much. I really did enjoy it. I appreciate what you do. Awesome. Thank you, Rick. So, for all of you out there today, if you have a question for myself or Rick, just click below and let's talk. Thanks for joining me today and I look forward to talking to you in the very near future. Thank you, Paul. Thank you, Rick.
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