Why This Top Acquirer Is Excited About M&A In 2024
This week Paul interviews Andrew Lotsis, CEO of Active Pro Rehab Partners, as part of our Delphi interview series. Andrew discusses his outlook on the recent downturn in M&A activity, and the opportunities that he sees just on the horizon.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon. This is Paul Martin and welcome to another episode of Paul Martin's Crucial Conversations. Today we have back with us once again Andrew Lisas. Andrew Lotsis is the CEO of Active Pro Rehab Partners. Active Pro is a private equity-backed physical therapy company based out of Cranford, New Jersey. And recently, ActivePro has joined PT Solutions as their newest and largest partner. And as of January 1st, Andrew Lotsis will become an executive vice president with PT Solutions. So Drew, I would say congratulations and it's great to have you with us today.
Thank you, Paul. Thank you very much. Glad to be here. All right, you're humble. You don't want to talk about these rising you rising up in these big companies. I know you're humble, but I also know you have a really good handle on this market. And the Delphi series that we have been running since back in September. It needs you. It it needs your insights. It needs you know, we've interviewed about 15 CEOs in the country right now, but we got to have your opinions on this.
So, let's jump right in with some of the questions. You know, as you look at the current trajectory of the M&A landscape in the rehab industry, what do you think are some of the key factors that are driving the M&A landscape currently? Well, I think it really is depending on your flavor, but at the end of the day, it really comes down to finding and understanding what a parent company's u strategy is in terms of total market dominance in given areas. Consolidation is going to continue.
And in a local market I think it's really important to have a total market dominance theory where excuse me most people understand that having a branding and a trajectory of certain counties and with the cross-pollination of consumer-driven decisions and the consumers today I think with the power of you know online decision- making and bringing a very retail approach to health care today being brand dominant in a given area maximizes opportunities that want to do that. What happened with us was that we had a private equity firm that helped us go from 23 to 65 locations.
And the truth is, as good as they were, they were really probably at the time too small for us on our growth trajectory. And I wanted a partner that was really aligned with understanding that when you are in a given market that you totally want to dominate that market. PT Solutions now with us has over 565 locations in 26 states and you know they're committed to building out communities and really want to dominate the msk market or muscoskeleletal market and understanding and bringing private practice the opportunity to consolidate and continue their growth trajectory.
You know one of the other leaning decisions of going with PT solutions Paul was their private equity firm. Their private equity firm is General Atlantic Partners. General Atlantic Partners is one of the top five private equity firms in the entire world. In 2020 they took 21 companies public. General Atlantic is a worldclass organization. So it was like a world-class organization with a world-class strategy and a world-class operator such as you know Dell and and Rocky who were the original founders and are heavily involved in it and they're worldclass people.
You know their company's phenomenal. The people are absolutely outstanding and their trajectory and their growth over the last five years has been incredibly impressive. So it was really a match of who the man is behind the Iron Curtain which was General Atlantic and their success and track record and then also the operating and model that our management team decided as a team would be the best fit in partnership with somebody strong going forward in the in 2024 and beyond. Hey, that that's good stuff, you know, and I would also tell you that PT Solutions as of January 1 is going to get a world-class executive vice president and as I have had said many times, probably the best operator in the country.
And it sounds like what you are saying is if you have acquirers that have really strong financial backing and not just the money piece of it, but a private equity group that has absolutely shown success in outpatient physical therapy as well as just health care services in general. And the desire to dominate in whatever markets they're in will continue to drive M&A in the rehab industry positively forward. Did I hear you correctly there? Is that is that accurate? Yeah, it's accurate. And and I think that listen, it's the biggest decision that everyone's going to make in their entire life in finding a good home or a good partnership.
And I think what happens Paul is that people lose sight on how important the agenda is of the private equity firm too and what's their success track record and what success have they had in the past as well along with that. So I think being with world-class people and world-class strategies with really you know smart understanding of how these businesses operate and what the challenges are and the headwinds to help navigate through those is really important. I think Dale and Rocky have had it right for a long time.
I think they built a world-class team and their success you know speaks for itself and you know I'm glad to be associated and and be partnered with their brand now and you know be a part of this team to help this company go from you know 550 locations to a thousand locations right and it's not about it's not about just the number of locations or the number of dots on the map. It truly is about the quality of the people and the model going forward. Over 75% of this entire management team has a equity investment in into you know the go forward plan and has a tremendous hundreds of owners that are still aligned with the right objectives and how to move forward and what that looks like for everyone.
Everybody's vested here and it's exciting. It really is. You know, everything's positive here. All I'm hearing is positivity. Drew, PT deals have been down 50% in 2023 as compared to 2022. If you're looking at, you know, the prevailing economic climate, which I know you are on top of probably every single day, what's your projection for the longevity of what everybody is seeing as a downturn in the rehab sector? Yeah, I don't think that's necessarily true. I think that with the right partner and the reality is that right now what people are doing is that this isn't 2018 or 2019 and the multiples have come down.
You know there's a reality check with that. As interest rates go up, money costs more, multiples go down. That's just the reality of the situation. And I don't see interest rates taking a tremendous downturn until after the next, you know, election cycle. The reality is that some of the larger operators are having you know I call it you know trouble or challenges in ingesting all the acquisitions that they did over the past years and are you know the interest rates have not been their friend. One of the things that's really attractive to me about PT solutions is that their debt level is not choking the company and they're very responsible in terms of the deals and also I would call it accreted growth right that they're building enough accretive growth over time that they're that their leverage position and debt on the books is not really you know a hindrance of any growth path going forward.
Some of the larger choirs quite frankly they're strangled right now. You know, they paid too much for things and then they didn't perform. That's a bad combination, right? Everything at Active Pro that we purchased, we grew at 50% within 18 months. Everything that we touched, right? We're going to bring that, you know, operating discipline here to PT Solutions and help integrate that a little bit and help this company continue to grow and create a created growth. You know, I think there's some, really good questions to ask, you know, potential partners for your clients and, you know, the whole industry, which I care, and that you brought me to 33 years ago, this fall where, I forget the name of the Italian restaurant where we first had dinner, but but I remember that the clams and spaghetti we both had were very good.
True story. Anyway, I you know, I wouldn't be here if it wasn't for you. We've we've been together a long time, Paul. I have so much respect for you and for Jamie and Jeff Hartline. We've been in this a long time and, you know, people really have to understand what they want their future to be and who they want it to be with. And at the end of the day, I think the private practice industry, it when you get to a certain level, it's very hard to, you know, create economies or create the going from, you know, one to two locations seems like really hard, but once you get up to 65 and 70 locations, it's like, you know, where do we want to be when we grow up and where are we going and who are we doing it with, you know?
The rehab industry has I think tremendous consolidation opportunities. It's really about understanding who the right partner is and who has the right winning formula. And all right, I'm going to pin you. I'm going to pin you down here. All right. There were 50% less deals in 2023 as compared to 2022. You gave some really good reasoning for that. In terms of the spending of maybe some of the large real big companies out there and kind of strangling them a little bit when all of a sudden you have higher interest rates, you have obviously inflation.
If we're considering that right now, we're still in 2023, we're still in a downturn. When do you think this will start climbing back up to a point where we're seeing the same number of deals even that we may have seen in 18 and 19 in 2000 moving forward in 2024? Is it first quarter, second quarter, third, fourth, is it 25? When do you see this market really coming back to where it was previously before the downturn in 23? Well, I appreciate that, but I really think all in all honesty, it comes down to what the market alignment is versus price versus what a fair multiple is.
You know, back in back in the late, you know, the late 90s and early 2000s, if you got a five or a six multiple, you know, I think that was a really fair multiple back then. And you know where the interest rates were and the market corrections. Money got so cheap that you know people got ahead of themselves and the private equity market wasn't where it was you know 20 23 years ago to where it is today. U there's over 2500 more private equity firms in healthcare alone that were that weren't in this 20 years ago.
Right. So, I think it's really coming down to when our owners manage expectations are correct and knowing what a real good price is that the market's going to turn when you know people really understand what you know a good multiple is versus you know some of the things that were three and four locations getting eight and nine multiples you know two years ago. I don't think that's the case anymore. I think wherever the market was two years ago, it's more of a multiple correction that's I think hindering the deals now a little bit and as much as I think there's still a lot of really good buyers out there and a lot of really good partners but at a fair price and I'm not saying that you know what people really have to keep in mind is that you know it's not about what you're doing now but it's about decree growth in the partner that you choose And if you think that you're going to take all your money off the table now and go and walk away, then you should take a very discounted multiple and so be it.
But if you're really going forward, it should be a very fair multiple now. And then in the future, you know, when you get that second bite of the apple, that's what I'm fighting for here. That's what, you know, all my management team is fighting for here. You know and the structure of our deal is really incentive it on the back end versus the front end of the deal. Now the front end of the deal should not be your biggest concern. Now the front end is what's your vehicle to grow out and have a partner that's going to help multiply and create an exit opportunity so that if you're a five to 10 location practice how are you going to get from 10 locations to 25 locations and then what's that accretive multiple that you create in growth over the next five years and looking at that as your really I think your opportunity versus because if somebody's so worried about today then to me then they're not worried about tomorrow right everybody has to have a stake in the future and where this is going that's the structure of today's economy and the structure of the deals today with everyone out there so Drew what I hear you saying is sellers expectations have to be aligned with how acquirers now are looking at deals which is somewhat unique as compared to 21 and 22 when money was free and they have to be their expectations have to be you know somewhat tampered in terms of what multiple but more importantly they need to look very carefully at the long term and the right partner to take them to that backend part of the deal as opposed to expecting all that on the front end.
Am I accurate there? 100% right Paul. I mean, if anyone thinks that they're just going to get a bunch of money and walk away, that's not the case. And that would be unmanaged expectations, right? And not right for a buyer or a seller to expect that today. I just don't think that's reality at all. And anybody that is looking just to walk away, you know, you should just take a very discounted multiple and then be on your way. But, you know, so to me all our deals at Active Pro were structured in that fashion that we're heavy on the back end and you know, I'm a big believer in, you know, continuing to work hard and built something great and and do it with a great partner that's not overleveraged that has a really strong financial backing and has proven success.
The one thing about PT Solutions is that their successful track record over the last 20 years, right? And you know it they didn't get in the business just to it was run and managed and owned by physical therapists, right? They got in it for the right reason and wanting to do well for physical therapists. They're they have an incredible learning center. Their dedication to clinicians is to me second to none. And I think that you know understanding all those parameters versus somebody jumping in the pool to think that they're just going to make money off of physical therapy would be not a great partner versus understanding what you know at PT Solutions and that other and some other acquirers you know this is a vocation more than a profession you know and you know I truly believe that when you do become a physical therapist that it is a vocation and that It's really dedicated to the success of the patients and the success of what is what does 100% full function really look like and what is a true patient for life versus you know somebody that just you know do you discharge a patient or do you just treat an episode of care and hope to see the patient in three to six months if they have another ailment right and aligning with those core values of why the whole entire company exists you know and these are deep dives like clinicians in their heart and their soul need to ask themselves when they are partnering with somebody or somebody that you're representing.
You know, Drew, you're not a physical therapist, are you? No, sir. You knew that. And and I know that, but I asked you that because I think for our listeners those who have checked in today and are watching this, I think it's really important to have an appreciation that Andrew Lis, businessman, finance man, for many years, is spending a lot of time talking about how important it is for therapists to serve their patients. Obviously with customer service on the front end of that, but in my experience, if the customer service from the therapist to the patient is at a high level, patients get better.
They get better. I will take somebody with a teeny bit less skill but a higher level of customer service and I believe they will be better performing therapists, clinically performing therapists than the person that has high levels of clinical skills but not great customer service skills. No doubt. So Drew, business owners that are out there and right now they're saying, "Okay, we know there has not been as many deals out there in 23 as there were in 21 and 22. We know the multiples may never come back from where they were in 21 and 22.
What strategies but they want to get into the market and they want to find a partner. What strategies would you advocate for strengthening their current market position? Yeah. So, I think I think you know depending on size of the practice itself, I think it's really important to show year-over-year growth, right? I think that now there may be an element that you're so busy that you can't add any more patients. You know, I wish everybody had that problem, but at the end of the day is that year over year, are you growing at, you know, 3%, 5%, 10%, 20%.
And, you know, really having a whole understanding of, you know, at what mature level is your clinic and what are the growth opportunities that maybe a potential partner would really look for. I think that sometimes you know if the numbers are down a little bit, you know, that's okay, too. But at the end of the day, it's at least understanding that maybe some of the synergies that a larger partner could potentially bring you to help grow out. Maybe there's like strategic strategies where they have locations in the area or more of a market presence.
You know my first love is with the private practice that's you know one to two three location practices that you know are really dedicated and could feel the level of service that they give their patients but at the end of the day you know maybe they don't have enough marketing bandwidth to hire a full-time marketing person or you know hire or make the investment in time because they're challenged on their rates or challenged on some of the aspects of that. I think also I know that everybody wants to deliver and listen in an ideal world it would be a 1:1 ratio one hour one patient one therapist right but that's just not the world we live in today with reimbursements and the challenges of being capped in certain markets with reimbursements.
So the only other way is looking at your production and how many patients per hour or how many patient per day your therapists are treating right and I think that in itself you know has to be understood and looked at in terms of what you know capability or capacity that the clinic or the therapist really have and from an operating perspective having your arm around that end of it a little bit you know if you ever meet, if one of your clients or anyone listening to this call is meeting with a potential partner, I think it's really important to have your arm around a number one your growth trajectory and what you have grown or not in the past two or three years and what that looks like and two what is your capacity to add more patients that if you did have an investment how much you could grow or what the potential is for growth itself.
Everybody loves growth, right? And you know what are we doing or is there a certain startup that you see that if you had more money or a capital investment or somebody to help you make a capital investment, where would you put that startup, right? And really having a growth plant in hand versus just a barge in the ocean just floating or do you want to be more of a speedboat? And how are you presenting yourself is look you don't have to have four outboards but if you have at least one outboard motor and you're looks like you have some direction it's good to have direction as opposed to just being a barge in the ocean.
So so as you look at a growth plan and you know you know an accountant can do a financial proform going forward. What do you look for, Drew, in a potential acquisition that you would be doing, in terms of the elements of that growth plan? What does it look like? What detail do they need to have to make it real? I just love your insights there. Sure. I think that I think one, you need to really have an understanding of what patients. So if you're averaging in your practice, you know, 15 new patients a week, right?
Number one, what percentage of your patients are returning patients, right? Is it 10%, 20%, 30%. I find that most private practices that have been in existence over five years are usually, you know, around 25 to 30% level of every new patient coming in the door is a repeat patient. Right? Number two, what is your direct to consumer plan? Right? Are you collecting emails and are you sending a monthly newsletter? I know that may seem simple, but you know, out of sight, out of mind. What's your connectivity to then that former patient base, right?
Then reminding them of the services that you provide. And then number three, with your referral sources, what type of relationships and how many referral sources or concentration of referral sources do you have? And how are you expanding them? So, do you have a sports program with a local high school? Are you teamed up with a local doctor to provide those elements? And thirdly, and a big one that I think gets underestimated is making an investment in a good real estate location. Right? I know that it seems like sometimes it might choke you or that it might be cost prohibitive, but I find that retail locations and shopping centers with, you know, supermarkets to me are, you know, being a retail business, healthcare is retail.
And in every sense of the word, you know, as part of the growth plan and what you would do, it was like really looking at your location. The basement of a building is not the best place to be, right? But moving to a high yielded traffic you know where there's some foot traffic that you can be seen I think you know has a lot of you know opportunity for itself. And lastly you know what's your website look like right I mean I know that there's some cost effective methods out there you know that help get a website up and running but are you doing SEO?
Are you tracking Google reviews? And so all these things, you know, call it growth 360 or whatever you want to call it, you know, all those elements play a part into, you know, new patient generation and how that plays a part of it. So you know, it it's it's hard to be in private practice. It's it's a grind. And but I'll tell you there's nothing like hanging your own shingle on the door and becoming you know the number one provider of these services that you all provide on a daily basis and just take a lot of pride in that you know it anybody that's in private practice I have a lot of respect for and understand their passion and so yeah and Drew it's interesting you know in all the growth discussion that you just provided you know, while you know, everybody thinks of growth as, you know, new dots on the map, new clinics, most of what you just described was internal growth opportunities and proving out those opportunities via, you know, what's the percentage of, you know, direct referrals, what where your referral sources coming from, etc., etc.
And I do think that's an area that many physical therapy privately held business owners negate in showing those growth opportunities and taking advantage of those growth opportunities. Well, I think that, you know, I've been in this business for a long time and everybody jumped up and down about direct access. Direct access, right? Well, you're all doctors of physical therapy and it should really be around I think the industry needs to continue to move we even more aggressively into being the number one choice of a muscularkeeletal injury in each community that you serve.
So the patient when they sprain their ankle should be calling you to come in and get evaluated and see what they could do for it or if it's you know a soft tissue injury like physical therapist should be the first person that should be on the mindset of and we should be reminding patients of those direct access opportunities and with strategies around that and evaluating the therapist and letting the families and their friends know that if they have a problem with their back, their neck, their shoulder, their knee, their hip, their foot, at their ankle that they can just come in, get a free screen.
You know, we did a at Active Pro under our twin at our breakthrough brand last week, we ran a a patient campaign, a direct patient campaign to the emails. And in one swoop of emails, we got we did a free screening. And with that free screening that we sent, he had to fill up on a form online. And in one email we sent, we got 60 requests for a free screening, right? Your end screening. 60 requests. Of those 60s, in the next three weeks, we're doing 45 screens.
And 45 screens are people that really they just want to come in and get treated again and take a look at something. I mean, and of those 45, maybe 25 or 30 are going to be converted into new patients, right? And and truthfully, that was that was that was one location in at our breakthrough brand, one location we did that with. So, you know, dust off those emails, get a strategy together, and contact your old patients, you know, they want to see you, too, you know, and they got stuff that they need to get fixed and and you're there to do that.
So, now it's just one location, you know. So anyway, well and I think that in an industry where we're only, you know, treating 10% of the available patients in the country that are out there, there's a lot of opportunity out there. Obviously we have to fill those positions, those physical therapy positions, those professional positions to be able to treat them. But I think if there's an ability and a willingness to do a lot of reachout no clinic in the United States should have a problem getting more patients and seeing more new patients.
Drew, one of the things I really wanted to hit on with you today is, you know, we're going to be doing a series on innovation and we're seeing a lot of new innovative technological advancements starting to come into the rehab industry. I'd love to hear from you. What areas of technological advancements have you seen and where do you think it's going to be most important as we continue to move forward in our physical therapy clinics? Yeah. So the biggest drag that every therapist has on a daily basis is you know doing you know typing out their eval the time away from the patients and doing documentation right so I think there's a current arms race going on where I think using AI and being able to go into an eval just communicated and when you walk out that avowal at 90% done and written based on the communication ations and the verbalization of that.
That's the world that I see this going in the next couple of years. And I know for a fact that large companies like Webp Rainree and WEBPT and things of that nature are all working hard on trying to solve that problem for everyone. And I think that's going to help the patients. I think that's more time with the patients. And you know, I think it's going to be better for everyone. I mean, if somebody's doing five of a week, I mean, in general, which is a solid case load, one a bow a day, you know, and you could cut out 15 minutes, or 20 minutes on each of the bow and then you could get a half hour, you know, to 45 minutes a day back to dedicated to more patient care.
That's better time well spent. I think also the continued evolvement of BI tools and you know that's going to continue to evolve and then you know more effectively patient engagement tools right and engaging the patients with real you know live activity had made great strides over the last two and three years and I think that's going to continue to evolve. I mean to me I'm excited like I feel like there's a rebirth in the industry a little bit with all this stuff going on now. I'm interested to see, you know, what the next five years brings and how that all kind of plays into part.
Absolutely. Absolutely. Well, Drew, as always, you have provided myself and our participants today with some really great and valuable information. So, I want to wish you the best of luck on your new position at PT Solutions. And I want to thank you again for spending the time today and providing us with such great information. Thanks, Drew. Thank you. Have a merry Christmas. You as well. And for all those out there today, if you have a question for myself or for Andrew Latus, click below and let's talk. Thanks for listening in and have a great day.
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