Recent Changes In Rehab M&A
This week, Tanny Crawford, our new Director of Business Development, leads a discussion with Paul Martin about the new emerging landscape that potential sellers are now facing.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello, my name is Tanny Crawford. I am director of business development for Martin Healthcare Advisors. Welcome back to Paul Martin's Crucial Conversations. Today's episode is titled Recent Changes in Rehab, Merger, and Acquisitions. Today we welcome back Mr. Paul Martin. Paul, thank you for being with us today. It's great to be here and great to be here with all of you as well. So, Paul, we we've heard before, I don't know if money was really free back in 2020, but tell me this, what recent changes have you observed in the rehab M&A landscape?
Yeah. To answer this question, I got to go back to that 2020 time. And we all remember what happened in 2020. It was one of the the greatest pandemics of all times. And we all remember where we were when we first started it and how we got through it. But I think what happened in 2020 was companies were able to access money free. So the capital was virtually free almost 0% interest rates and then through that 2020 year they had all this pent up capital. So 2021 and 2022 those were what we would call the greatest rehab M&A market that we have ever seen.
Higher multiples more transactions and what happened is two things. One, a lot of the big companies made doubledigit multiple transactions. Then at the end of 22, we started seeing a rise in inflation and a rise in interest rates. But nobody was really clear when this rise would stop. And so what we're describing 2023 as, it was really a recession in the merger and acquisition industry in rehab. A recession because there was half there was less than half the number of deals done in 2023 as compared to 2021 or 2022.
But towards the end of 2023, what we saw is the interest rates and inflation became steady and the outlook on that for 2024 was positive. There was talks of potential drops in interest rates. We haven't seen that yet, but it has stayed flatlined through 2024. So in 2024, we are seeing a major rebound of companies getting back into the market, new companies with lots of interest in acquisitions. So I'm sure these changes, the recession of 23 created the increase in interest rates created some angst among the u rehab space.
How have the changes impacted the way mergers and acquisitions are conducted? Yeah. Well, [sighs] you know, in 2021 and 2022, some of the companies became too aggressive and they acquired multiple companies. They did it with double digits and unfortunately because of that they ran their capital down and their debt to equity ratio, not to get too, you know, investment bankish here, but that debt to equity ratio went out of whack. And so some of the larger companies had to, you know, kind of go to the side of the road and, you know, get their tires pumped back up.
And what that offered was an opportunity for new acquirers. And these new acquirers now are in the market, but they've seen what happened to some of the large legacy acquirers. So, what we're seeing in 24 is that acquirers are aggressive, but they are very meticulous and thorough in their valuation process and especially thorough in their due diligence process. Yeah, I see that some of those companies had to kind of take a step back and review. Okay, what have we done? And now I'm sure some new trends have emerged.
Have you picked up on any new trends that may have shown up in the rehab M&A market? I have. You know, some of these companies that are looking to acquire businesses in markets. They're wanting companies that have been able to be very efficiently run and managed. They're looking for an EMR that is on the cutting edge as opposed to trying to you know rehabilitate an old EMR. And if you're still on paper, I would tell you will not be able to sell in this current market unless you're willing to give your business away.
I also think that some of the newer companies in the market today are really showing some flexibility in deal structures as well as in, you know, the kinds of companies they're willing to acquire. We have many companies that have some additional programs. Home physical therapy is something that many of the companies that we're working with, they're kind of doing that on the side. Pediatrics has now become a very sought-after program for many of these companies. And so I think that with the combination of new companies that are a little more flexible and we're now seeing some of these legacy companies are now back in the game or we're hearing that some of the legacy companies are going to go through what's called a recap.
So there will be a new private equity group that's going to come in and typically when that happens is new money. They are going to be much more aggressive than the company who is on their way out with that equity private equity sponsor has been. So I think that there definitely is a focus from sellers now being able to look at new opportunities with some of the newer companies as well as some of these legacy companies as well. Yeah, the EMR piece really rings a bell.
U some of our listeners may not realize, but there's a lot of manpower required for a EMR transition, right? So, Paul, thank you for joining us today. Thank you. This information has been great. Thanks again for being here. Ah, it was great to be here with you today, Tanny, and great to be here with all of you as well. And for all of you watching, if you want some more information or like a conversation with us, click the link below. We'll be happy to talk.
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