Where is the Market Today and Where is it Going?
In this episode, Paul welcomes back two of MHA's top leaders, Tom Carden and Joe Anzur, to discuss how the market has recovered from last year, and to suggest how you can best prepare for its next stage.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello and welcome to another special follow-up episode of the Martin Rehab M&A Advisory. I'm Paul Martin and I am the founder and president of Martin Healthcare Advisors and today real excited to be joined by two of our senior leaders at Martin Healthcare Advisors, Tom Carden and Joe Anzur. Hey Tom. Hey Joe. Hello Paul. Hey Paul. How are you? Good. Good. Good. Good. So let me just give you a quick background on Tom and Joe. Tom is a seasoned business leader with over 30 years of experience in financial services and healthcare services industries.
He was the senior he is the senior managing director at Martin Healthcare Advisors and he provided strategic consulting and M&A advice to middle market physical therapy companies across the United States. He has an extensive background in financial services, including a role at CIT Healthcare and his own company called Healthcare Business Credit Corporation, and he currently serves on several healthc care services boards as well. Joe has four years of experience doing specifically outpatient physical therapy deals with Martin Healthcare Advisors and that's following many years of executing large healthc care deals at Johnny Montgomery Scott.
Joe also brings a wealth of knowledge and expertise to the table making him an invaluable asset to our team. And today what we're going to be discussing are the current market conditions and why we believe at Martin Healthcare Advisors that this is a really good time for phys physical therapy business owners to consider partnering or selling their company. So you guys let's dive in. Cool. Cool. So, in terms of market conditions, Paul, you know, we just finished the first half of 2024 and it was very strong and, you know, we've got really strong tailwinds going into the second half of the year.
You know, if you think about our own company, you know, we closed five deals in the first half. You know, we have four deals that are in due diligence. We got five deals that are in the market. And we've got, you know, six, seven deals that we're prepping to go to market. So, the market's very strong. You know, we had we have some changes going on though. You know, some of those really big companies, the upstreams of the world and ATI and Athletico, you know, they have not been active, but you know, companies like Confluent, US Physical Therapy, Ivy, you know, they just completely picked up the market.
And so, you know, there's a lot of activity. There's very strong demand. I think the second half is going to be bit better than the first half. And you know, we're very confident in what's happening in the market. Yeah. Yeah. So, so Joe, talk to us a little bit about inflation and interest rates. You know, we've had steady inflation rates and a potential for an interest rate reduction. We keep waiting and waiting. And how that impacts valuations and attractiveness for acquisitions of an outpatient physical therapy practice.
Yeah. Yeah. Absolutely. And I mean I'll just start off by really echoing what Tom just mentioned as you know the second half of this year probably will be even stronger than the first half of this year. In part really due to what you had just mentioned as well. You know, over the past couple of years, we've seen, you know, we saw inflation top out and it's been declining and, you know, interest rates basically following. I think one of the next big events being the Fed meeting that'll be happening later on this month, we may see it stay stable.
Are we going to see a rate cut? You know, maybe not. But I think the trend of the rates really stabilizing over the past couple of years and a lot of these larger groups that are so debt laden, you know, they're they now have a predictable cost of capital. They know how much money they're actually able to pay for these different companies and what these valuations, you know, what the return on those investments can really look like today as opposed to a couple of years ago when these rates were just, you know, skyrocketing.
Now it's, you know, I'm not saying we're at anywhere near that zero rate environment that we were at say pre-COVID in 201819, but we certainly are getting closer and closer to those levels as opposed to what we were seeing, you know, when the market really bottomed out a little over a year ago. And, you know, in turn, that'll likely lead to, you know, hopefully more attractive valuations down the line. And Joe, it seems like, you know, what we saw at the end of 2022 were continuing rising interest rates, rising inflation.
And it really didn't get that high, but it was, you know, kind of the when is it going to stop? And so now it seems to have leveled off. And just leveling off, has that been enough to really gain you know, some new buyers into the industry and some more investors into the industry as well? Yeah. Yeah, I definitely think so. And you know what you had mentioned, it didn't get that high, but keep in mind back then we had no we had no idea how high it was going to go.
Fortunately, it didn't get even higher. But yeah, the leveling off it definitely, you know, kind of eased some minds and, you know, with some new entrance into the market like Tom had mentioned, some of these very large groups, you know, that have been a bit quieter, you know, they have these, you know, capital restrictions in place. Some of the smaller groups that have been coming in, they're making acquisitions that where they, you know, they're using these initial funds that they have raised where they don't really have to be as heavily dependent on debt and therefore interest rates.
So, that kind of really created this opportunity for a lot of these newer groups to really starting to get a bit of a foothold into the market, you know, where they had the capital on hand to really make those acquisitions as opposed to, you know, having to go to the bank, get some debt. So, I hear you saying that the legacy companies, the big companies are feeling some pressure from some of the smaller newer private equity backed companies in the in the market. I think that's a fair assessment.
You know just the pressure there and just internal pressures you know when you grow to grow to that size you know it's just you really need to be careful you know how you are using your capital whether you want to use it to you know have denovo and internal growth whether you want to use it for acquisitions you know you really have that tradeoff in terms of okay what's going to create that greater return on my investment for the capital that is now a bit more limited than it was say three four years ago.
Yeah. Absolutely. So Tom, you mentioned again the significant role of private equity in the market and there's several large private equity back companies that are sponsoring rehab companies and they're nearing that fiveyear recap mark. How do you see that this may impact M&A in the in the rehab industry in the future? Well, you know, it's most of the companies that we see recapping are going to recap with another private equity firm. I just don't think that Strategics are going to buy them. You know, you look at the big three, you know, that are all, you know, have some some debt issues.
So, so, you know, they're not going to buy them, you know, and so they'll recap again with another private equity firm. And there's plenty of private equity firms that want to get into the rehab industry. And then there's also private equity firms that have exited, you know, waited out their three, fiveyear non-competes and want to get back in. So, you know, once somebody restarts the clock on a on a recap, you know, they want to double to triple in size. I mean, that's their goal. And so, that just means there's more demand and you know, for really quality companies and leaders.
So, I think it's going to have a big impact. You know, you look out 12 months and you say, "Yeah, there's maybe two or three that could recap, but then when you look out 12 to 24 months, it's like five to six, right?" And so, you know, the one of the phenomenons that we saw with Upstream Ivy and some of the others, they did they didn't recap, they did what they called, continuation funds. And so private equity loves the deal. They they want to stay in the deal, but you know, they have to get some money back to their investors.
And so they'll bring in some additional investors to continue along with themselves and take some money out. And I think with the companies that we're going to see recap, they've done amazing jobs. And so, you know, if you're a private equity firm, you're saying, "Hey, I like this team. I like this industry. I have all this money still because remember they haven't been deploying that much money in the past two years. You know, I don't want to take more money back and so I think we're going to see some more of that.
But but Paul, it's going to happen in the middle market. You know what I mean? It's going to happen with those companies get out have 150 to 250 in clinics. So, that's definitely going to have an impact. And look, you know, we never thought that rates were going to go down, you know, five, six, seven times in 2024, but, you know, with some of the recent data, you know, you could see, you know, two drops in the second half of this year, if the Fed drops the rates, I mean, it's going to go crazy.
I mean, it's really going to go crazy because you're not worrying about rates going up. You're not worried about them being here, but if they're coming down, you know, for private equity back companies, that's the best case scenario. So, there's going to be a lot of action coming. Yeah. Yeah. So, Joe, you are very close to companies and their performance and not just financial performance, but operations performance as it impacts value. Look, efficiency is the key in today's market. What are some of the common areas where you believe physical therapy practices can improve on their operations in order to be more attractive for some of the potential buyers out there?
Yeah. Yeah, definitely. So, one of the most common, you know, measures of efficiency and, you know, just overall productivity of your therapist, your treatment staff, and that really comes down to your care model. You know, how many visits per hour are, you know, your therapist seeing? But even outside of that, you know, going into the coding and the billing side of things, you know, that's an easy internal lever for you to pull. Not just are you, it's not necessarily are you billing more units, but are you billing the right units, you know, are you billing something that's, you know, you can potentially receive $30 for as opposed to $3 for, you know, just thing things of that nature.
And you know, outside of just the billing side, yes, you can go ahead and code and charge all of the correct units and amounts, but on the revenue cycle side, I mean, are you actually collecting the dollars? That is key. You know, looking back the first quarter of this year really comes to mind. That change healthc care breach that had happened that impacted a ton of business a ton of our businesses on the revenue cycle side where you know they had upwards of 70 to 80% of their collections you know just basically being held back and you know money wasn't coming through the door despite you know some proper charges and internal operating efficiencies.
But again that revenue cycle side having the right billing and collections team in place whether it's internal or outsourced and you know actually being able to get that cash coming through the door that is being built out you know I think that's something that is very is kind of a very underrated aspect of you know operating the physical therapy business granted of course you need to you need to have the evals have the referrals get the visits in place you know obviously keeping track of that on a daily basis but also making sure that all that is being done properly and compliantly as well most importantly.
And Joe, are you seeing business owners as they start looking at operations information, financial information on a monthly basis that they are seeing that tie to financial performance driving bottom line, I'm sorry, operations performance driving bottom line financial performance driving value. Are are you seeing that in a lot of our clients? Yeah. Yeah. Absolutely. And I think it really you know it does take some time because you know the operations are the leading indicator of the financials and you know as you bring in more and more of those visits and you know those charges tick up again.
You know after that 30 to 60 day time frame that's really when that money is coming through the door and that's when you're really seeing it on your profit and loss statement. It's not going to happen overnight, but you know, as those operations are trending in the right direction, then it will happen over time. It's not a matter of if, it's a matter of when. So, absolutely seeing that. And especially as people, you know, continue to prepare for market and you see that trend persist on the operation side.
You definitely see the same exact things happen. You know, maybe another maybe a month or two lag on the financials. Absolutely. Yeah. And Tom, you know, Martin Healthcare Advisors has a long history obviously working with physical therapy providers. Explain to everyone out there how our outside in assessment can really help a business owner prepare for not only their future but also for how they may be able to test the merger and acquisition market. Yeah, sure. You know, so when you when you look at our company, it's truly unique.
You know, we have five PTs on staff, you know, there isn't another consulting M&A firm out there that brings that kind of talent, you know, into a client engagement, right? And so, you know, most people they think they're doing some know they're not doing great, but most think they're doing pretty well until we say, "Hey, look, let's let us look at your information. Let's let us do our analysis and let's compare you know not only to industry standards but lots of times Paul you know we can say well in the state of Texas this is should be your cash per visit and this should be that you know so we have we have 25 years of data you know that we're bringing in but what really happens is the realization that you know what my business can be better and lots of times even though you know they know the client knows that you know they're not billing right or they're not collecting right, they just don't know how to fix it.
Right? So, so we go and we come in, we do an assessment and we say, "Hey, look, here's how your company compares to others in the industry, others in your state, others in your market." and this is our areas of improvement. These are things you do really well. These are things where you need areas of improvement. And so, you know, our consultants will work with these companies to improve those areas of improvement. But during that time, you know, we're getting to know that company. We're getting to know that leadership team and you know, we interact with these companies all the time, meaning the M&A function.
So, we know them, right? We we already have all the information in the right formats, you know, as they look to go to market. And so we have we just such a competitive advantage there. And it's really this intense client engagement, right? It's intense client engagement. And so it's worked really great for our clients, you know, they can see what's happening. We can help them project, you know, based on current operations. We can help them with timing, right? You don't time the market, but this is might be the right time, you know, for you to go wherever you are in your you know, your plan to grow your business.
So, it's really unique and it's been it's been hugely successful for all of us, especially our clients. So, the OIA is something that, no one else does, and it's just a it's a great product, but it's a great product because of the people that are working on the project. Yeah. Yeah. Absolutely. It's just, you know, I see it sometimes almost, you know, it's like a tag team. Okay. You're it because they need some financial help building out their financials properly. No, physical therapist. Now, you're it because they need help in their coding.
And then we start putting all that together and next thing you know a company's has doubled their bottom line and they've you know you know tripled or quadrupled their value. So yeah it's really cool. Yeah. Really cool. But but they also they also improve as leaders, right? They they also improve as teams, right? And and you know the consulting colleagues, you know, they do a lot of that. You know, is that the right person on the bus? Is that person the right person the right seat on the bus?
You know, this is kind of where you got some weakness. You know, Joe was talking about collections and things, you know, so they get to get a third party educated third parties experienced opinion on, you know, team, you know, marketing, whatever it may be. So, it's we and you know we as we're going through the M&A process, we're always reaching back over to you know our consultants to say, "Hey, look, you know, something came up here in due diligence. Help us. You know, what do we need to do?" And so, you know, again, that's just a great asset for the client.
Absolutely. Absolutely. So, Joe, last questions going to you. Let's look ahead. What are some trends that you foresee in the outpatient physical therapy industry merger and acquisition market over the next few years? What what are some of the trends that you foresee? Over the next few years, you know, certainly a lot more consolidation happening now. You know, just kind of looking at some of these companies that are, you know, maybe in that 20 to 50 clinic range, they there's just not as many of them anymore.
So, I don't know how many more of these, you know, real direct platform acquisitions will be occurring from some of these new private equity groups that are coming in the space. Whereas now, I think we're seeing a lot more of that. I guess call it more of a traditional rollup strategy where you have a few clinics here and there that it starts out and then, you know, kind of acquiring here and there, you know, a couple clinics in a few different states and then keep building from there.
Almost like a hub and spoke type system. I think that's something that'll play into it. You know, I think, you know, it it's just tough on the reimbursement side. I know that's why operational efficiency is becoming more and more key really. You can't just keep your visits and your evals flat year-over-year because quite frankly, you're become going to become less and less profitable. Number one, you're going to the reimbursements that have been going down and, you know, just the cost of labor that have been going up.
And it probably will continue to go up over the next few years. So I think again like you had mentioned earlier just the real need for the operational efficiency there. Not necessarily saying hey how do you ring every last bit out of the business but how do you make those small slight tweaks and improvements to really continue going up and in the right direction. You know, I think those are two things that that'll continue to trend there. And in the next three years, I we'll probably end up seeing at least one more publicly traded company.
Probably. I think those are those are a few I think those are a few things. Absolutely. Absolutely. Tom, anything before we part ways? No, great conversation. Great to be with you. I look forward to doing this at the end of the year. We can we can recap the whole year. Yeah. No, that'll be great. That'll be great. Well, for all of you out there who were able to listen in today, again, you know, Tom and Joe, they are in this every single day. You know, working through deals, working through new opportunities, working through, you know, obviously taking companies through the entire process.
So, if you have any questions for myself or Tom or Joe, u just click below. Let's talk. Tom and Joe, thanks for today and look forward to seeing you all in the future.
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