The Rehab M&A Window of Opportunity Has Reopened
A new M&A chapter is beginning in our industry, and if you want to stay ahead of the curve, tune in to today's episode to learn how you can shine above the rest when it comes time to start looking for a partner.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon and welcome to another episode of the Martin Rehab M&A Advisory. I'm Paul Martin, founder and president of Martin Healthcare Advisors and Martin ABA Advisors and I am so excited to be with you here today. We are going to start a new series today. This is going to be a three-part series and you are going to want to tune in. I promise. The name of this series is the rehab M&A window of opportunity has reopened. And so how do you shine above the rest? How do you get to the top of the list?
So again, I welcome you to this new series. And again, if you look back in the rehab industry and the rehab M&A industry over the last 3 to four years, you know, coming out of COVID, all that pent up capital, all those deals that were on hold in 21 and 22, this industry just exploded in terms of mergers and acquisitions, high multiples, lots of transactions being done. In 2023, things really dropped. It was trepidation about interest rates. When are they going to stop going up? When is inflation going to stop rising?
And so we really went almost half the number of deals in 2023. Then either 21 or 22. That's almost called a recession, right? So we really had a tough 2023. But I am telling you what we are seeing in 2024 is that the window of opportunity has reopened in rehab mergers and acquisitions. So again, our goal in this three-part series is to position you at the top of the acquirers list. So let's talk about the competitive landscape that's out there. What's really important to understand is that acquirers in this current market, they have multiple options.
What I mean by it that is they have lots of companies that are putting their hands up and saying it's time we want to partner, be acquired, sell, whatever you want to call it. So they have lots of options right now. So, how do you stand out if this is something you want to do in 2024? I use this analogy all the time. How do you move to the top of the draft board with the NFL draft? Just, you know, just behind us or the start of it ju just last night.
How do you move to the top of that draft board? How do you become their number one pick? Because they are juggling multiple deals simultaneously. And so it's really imperative, put yourself on their side, put yourself in their shoes. It's imperative that you run a process on your side is what we call a no delay process. This means you do everything you can on your side to make sure that there are no delays brought up from your side of the ticket here. And we believe that one of the best ways to make sure that you do that is to bring the best team to the deal.
The best team will get to the top of that list. No fooling. So, how do you assemble what we're going to call this dream team? You know, the team should consist of, you know, many professionals, but first and foremost, we believe it should be led by a professional M&A advisor. Second, you need a real strong attorney on your team as well as a real strong accountant. And that could be both a tax accountant as well as a regular bookkeeping accountant. And then the other part of the team you want to bring to the process are your internal leaders.
Now, it does not mean that those non-owner leaders have to know about your intent prior to a closing, but you want to make sure you've built that leadership team. And so, again, the three-part series is going to be first today we're going to talk about choosing the right attorney, the right accountant and tax advisor, number two, and number three is how to build that internal leadership team. Before we jump into the attorney, I do want to touch on just a couple points on picking the right advisor because it's important.
Look, it's what we do. So, I won't spend a lot of time here. First of all, it's really important that your advisor has industry knowledge. I mean, deep industry knowledge. It really gets into the nuts and the bolts of your operations, of your of your clinical guidelines, of your coding, etc., etc. So having an adviser that has not only a lot of merger and acquisition experience but also industry knowledge is key and critical. Second, they got to have the trust and the confidence of acquirers in today's industry.
And I assure you there are we consider ourselves professional adviserss but there are business brokers out there that do not have that trust or confidence from the acquirers. And the acquirers will step back if they see that you're being guided by some of these companies out there. You want to make sure that your advisor is running a process that is owner goal focused and that they are continuing to refresh on goals of the owners of the company to make sure that they're making the best match.
Now again, our first episode today is going to focus on your choice and kind of the role that the attorney plays in a merger and acquisition process. Well, as you know, there are many types of attorneys that participate in M&A deals, and that ranges anywhere from a real estate attorney to a litigation attorney. Sometimes corporate attorneys are guiding these deals, employment attorneys and many others who you know literally get very deeply involved and advise on many merger and acquisition deals. We believe it's absolutely critical and we have facts to prove this to choose an attorney that has specific experience.
Kind of give you the top to bottom, but at the very least specific experience in health care services, mergers and acquisitions. So, how do we kind of prioritize your legal expertise? And I think in terms of her priority, first and foremost, an attorney with healthc care services acquisition experience, as I just mentioned, is at the very least. What would be a better choice is an attorney that has at least done one outpatient rehab transaction as a part of their experience because it will at least give them the understanding that they have seen a document, that have seen certain things.
It gives them a leg up. But if you want to have the best team, you're going to utilize an attorney that has multiple and has done multiple outpatient rehab transactions. That will be your best option. So why does this specialization matter? Can't any attorney take a document, go through it and know what things should be changed, moved, negotiated, etc. You know, to give you the answer to that, why it matters. It's important to understand that acquirers in this current industry, they fall within one of these three categories.
There are some privatelyowned rather large companies that are more than likely funded by banks, bank or a bank or banks. And they have certain stipulations that bank financing has certain stipulations that in a merger and acquisition deal are written in their agreement. So, so they can't change it. Now when you then get to the next level of many of the companies in today's industry that are backed by private equity that comes with a whole new level of stipulations between the agreement between the private equity group and the strategic company as well as the private equity group has stakeholders that have invested in their capital and in their fund and they also have bank financing as well.
So there's all sorts of things that they have agreed upon and cannot break some of these things that are within their agreements. And then you have publicly traded companies and that comes with a whole another host of legal items that just can't be changed based on the agreements that they have obviously in the public market. And what a specialized attorney has is they have an understanding of some of the unique demands and the limits of these funding sources. You know, in our view as we look at what is the real role of an attorney in a merger and acquisition process, it's not to run a process.
It's not to negotiate you know business items within an M&A process. It is to protect your legal interest as well as clarifying the risks that you will have going forward. And there are some risks again that you're going to have to live with because it's already built in to an agreement that the acquirer has. And so to have an understanding of what can and cannot be negotiated based on the acquirer agreements and funding sources is absolutely key and critical. And the only way an attorney gets that understanding is to have done many of these transactions.
You know, again, for an attorney to understand the non-negotiable and typically they come up in the reps and warrantees, which trust me, they're a little scary, as well as other non-negotiable legal points. To understand those and for them for that attorney to be able to explain that to you will save you an enormous amount of time and money. So what is what could be the consequence of inadequate legal representation? We've seen this. Okay, we have seen this. The risk of hiring an attorney without some industry specific experience is first and foremost you have the high potential that it's going to frustrate the acquirers because there will be unnecessary disputes.
They're going to have a deal right next to yours that they're working through that an attorney has that experience and they're fighting the things that they should be fighting and your deal is going to go to the bottom when they sense that you have an attorney that really does not understand these documents and what they can and can't agree to and what they can move the needle etc. You also run the risk of what we call being deprioritized by acquirers due to inefficiencies and the legal process is one of the longest stages of a process.
So if that gets pushed out now you have what we call deal delay and acquirers are moving at a pace. They want to do transactions in the window where they have a certain level of borrowing power. You know what guides these acquirers are accessibility of capital and the cost of capital. Right now, capital is fairly accessible and the cost is certainly not as low as it was back in 2021 and 22, but it has stabilized and so they are living with these interest rates and all doing very well with their deals.
Well, I appreciate your time today and look, legal discussions are never easy, right? This is always a challenge. So, I am hopeful today that I've been able to answer some of your questions on if you're starting to build your team, what you should be looking for in the legal representation for your team. Now, what's coming next is what we believe the role of your accountant and tax advisor should be and how you can best choose that member of your team. Look, if you want to talk to me about what we've discussed today or any other topic in the rehab M&A world, just click below and let's talk. Thanks. Have a great day.
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