How The Top CEOs View Our Market: A Comprehensive Analysis
The results are in for the first half of our CEO Delphi Analysis. Tune in and take a look at what the top CEOs believe the outlook for our market will be in 2024 and beyond.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello and welcome to another episode of Paul Martin's Crucial Conversations. Today we are so excited to unveil for all of you the results of our CEO Delphi analysis. As many of you may remember back a few weeks ago we presented that we were running a deli analysis based on interviews with some of the top CEO acquirers in the country. And this was being done at what we believe is a very pivotal time because many of you out there are wondering what's the future trajectory of the rehab M&A industry, right?
What is going on in this industry right now as it relates to mergers and acquisitions? What's the trajectory? Where are we headed? And so what we decided to do is to go straight to the source of the CEOs who are doing these deals to find out what their views are and what they're seeing and what their private equity groups are telling them will be the trajectory of this market going forward. We decided that traditional models and strategies and articles that you know in many markets can be reliable but those are being challenged in this current market.
Our industry and the M&A rehab industry is evolving faster than ever and with that comes the pressing need for fresh expert perspectives and that's what we have gotten and that's what we want to unveil for you today. So again, this unique series dives deep into the minds of the top CEOs, what we would call the industry trailblazers or thought leaders. This is not just about numbers or generic views or articles that may have been read. This is coming directly from the top CEOs in the country.
We've done more than a dozen of these interviews now and we're poised now to continue this and grab another dozen in the next six to eight weeks here. So, this has been a collaborative effort to really understand where is our position in the economic climate and where are we going as an industry as it relates to mergers and acquisitions. All right, let's dive in. So the first thing that we asked was how CEOs perceive the current trajectory of the rehab M&A market and what are the things that are most driving this trajectory.
Well, as we analyzed the responses from this, as you can see, 70 72% of these responses were on very much on the positive side of this, which is expecting an uptick, expecting more buyers to come into the market and anticipating and expecting better economic conditions, which we are now already seeing. So, they were right. 28% were kind of neutral and that there would be an eventual return to normaly and that there's still opportunities for sellers but they really weren't sure when economic trends would improve. All right, the next in this next question, I will tell you I had to be a true detective on this question, forcing these CEOs to give me a date when they believe this downturn would actually begin to improve.
86% said the market will stabilize and come back in one of the four quarters of 2024. And of that 86%, 70% of those were betting on a Q1 or Q2 2024 turnaround. That means that we're going to see lower interest rates, better cost of capital, higher valuations, and significantly more deals. Most of them saying Q1, Q2 of 2024. Good news. Now the next question was really aimed at these acquirers and how they can give you advice. What advice are they giving out to you in terms of your ability to go into this current market and what are the most important things that acquirers are looking for?
What are they looking for? 90% said that the most important strategies that you could embark on as a potential seller in this industry first and foremost was alignment of people and culture. We harp on that all the time how important that is in a deal. Second was low turnover. Third was truly having an understanding of your business. Fourth was actually doing your own research, you know, into who is out there, what are they up to and speak with experts who are in this industry every single day.
And certainly we are one of those experts. Now 60% in addition said to strengthen systems, strengthen your financial systems, your operation systems, your clinical systems. Assess and look at improvements in some of those core KPIs and do some research on who the potential buyers are out there. And finally, clean up these f your financials. Such an important piece to every single deal is having very clean financials. All right. Next question that we asked them this was to understand from a CEO perspective. What do they see as the biggest challenges and the biggest opportunities going out over these next three to five years?
Very interesting. 50% said valuebased care is one of the things that will be the greatest that will be one of the biggest influencers for physical therapy and rehab reimbursement in the future. Now when I was at the PPS conference I asked raise your hand if you are currently being reimbursed in a structure as a valuebased care structure and no hands went up. So again, we're not seeing this yet, but it is something that a lot of the CEOs believe is on the horizon. And I will tell you my opinion is we are the greatest value in healthcare.
And if we can prove out that value, we got to do it before they do, we are going to see an uptick in our reimbursement. A very high number of folks are thinking that while the economic conditions are going to get better that we should expect at some point in the near future another downturn. That was not good news. But that was a large percentage. And then finally, a high number of the CEOs are seeing that people and labor are also going to be a continued challenge in this industry.
We see it. We hear it. Some states it's worse than others. But certainly people in labor are a big challenge to physical therapy business owners. All right, next question. Now this is something that we discuss every single day among our group and that is what are the acquirers seeking in this market? Not what it was a year ago, not what it was five years ago, but what are acquirers looking for in this market? Now 58% believe that we need to expand our services and footprints. Meaning we need to show the ability to grow and I love this and that grit and resilience will be key.
I am hearing this over and over again about our industry that one of the things that's attractive for acquirers coming into our industry is how we as physical therapy business owners showed grit and resilience getting through COVID now getting through some of these staffing challenges getting through high inflation getting through high interest rates. So we continue to drive through these and this was one of the things that acquirers are looking for in this market. They want to know how you got through COVID, how you've gotten through some of these economic times.
How are you doing in recruiting and retention right now? You know, a large percentage also felt that fundamentals will stay very high on the acquirers list. And this goes to again the ability to contribute and more broadly what that means is once you're acquired are you a company that's going to grow. Again we talked about grit and resilience a desire for a partnership. Many of these CEOs have partnership models and they're not looking for businesses where the owner just wants to get out and does not want to roll any of their equity into a new partnership.
And then the fund the fundamentals of valuations have just not changed. Still based on margins, growth, people, performance, which includes obviously KPIs and culture. So again, you know, we had 58% on the side of the resilience, but on the 42% still saying, look, those fundamentals are still increasingly important in this new market. All right, couple more slides here and so let's jump through to the next one here. Technological advancements, very interesting here. 58 as we looked at how technological advancements will enter into their decisions making merger and acquis acquisition decisions 58% believe that there will be new tools quickly on the horizon and I would imagine obviously this all feeds into AI but with data analytics okay AI potential what the potential will be for AI and where will be will we be able to use it in order to speed up our processes.
Can it be used directly in a process of due diligence? Certainly utilizing better technology to speed up this process will enable deals to get done quicker which will bring more companies to spend money in this market on your businesses. All right, next question. And you know, this was one that we were actually somewhat surprised looking at how regulations and policy changes will shape strategic planning for mergers and acquisitions in the future. And 79% were just very neutral. 21% felt like it could have a major impact, but 79% were very neutral on this and did not see any major regulation and policy changes coming our way, which is good news.
And then the last question again kind of seeking their mentorship for companies looking to go into the market right now. And so again, the question really was, you know, for owners that may be hesitant about entering into the M&A space, what are advice would you offer to kind of ease their concerns? Well, you know, 100% said again, make sure you understand your business. And while this seems kind of, you know, kind of surfaceoriented, hey, I know my business, it's really I it's look, we're physical therapists who own businesses.
Okay? And so many cases treating patients every single day. And as we're preparing for the market, I think we have to add another element to as a business owner to that job description, looking at your business beyond clinical and really understanding inside that watch what makes that business tick. Really knowing what you want is something else. Knowing what you want in a partnership or an acquisition. Certainly don't procrastinate right now. Get a dialogue started. Understand this is I think one of the things that they really stressed.
Understand what your buyers are looking for. What do they want? 100% had those four. Understand your business. Know what you want. Don't procrastinate. Get some dialogue started and understand what they want. 60% also chimed in saying that market preparation is absolutely key to being successful. You have one shot to do this. Okay? You can't do this in a variety of times and places and steps. You need to put all the companies on the same starting line at the same time. Drop that checkered flag and run that process.
They also recommended 60% to speak with a professional. You know, do your diligence on prospective buyers. I would tell you that speaking to a professional, you know, we can give you a lot of information on these acquirers, their tendencies, how they kind of how they went through due diligence in their last couple deals, etc., etc. We can really give you a lot of information there and I think doing that diligence is really important. So big question I would have for you is after going through these deli analysis from these interviews, how many of you are feeling a little bit better about the future of the rehab M&A market?
Well, we're now embarking on our second set of interviews, and I have a strong belief that when we come back to you and roll out our second 12 to 15 interviews that you will see have even more of a sense of positiveness as we move into this market, as you look at the market and see opportunities are abound. Hey, this is Paul Martin. I enjoyed talking to you today. Hey, if you have any questions based on the information that I shared with you today, click below and let's talk. Thanks and have a great day.
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