Be The First To Capitalize On The Upcoming Opportunity
This week Tom Carden and Joe Anzur, the leaders of our M&A practice, join Paul to discuss the current market conditions, and why the time to begin preparing for a transition is right now.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello and welcome to another episode of the Martin Rehab M&A advisory. I'm Paul Martin, 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. How's it going, guys? Hey, Paul. Hey, Paul. How's it going? Good, good. So, quick background. Tom, senior seasoned business leader with over 30 years of experience of financial services and healthc care specific services as well. Tom is the senior managing director at Martin Healthcare Advisors and he has provided strategic consulting, merger and acquisition advice to middle market physical therapy companies across the United States for many years going back to 2008.
His extensive background also includes roles at CIT Healthcare and Healthcare Business Credit Corporation and he currently serves on boards all over the country. Joe has been with us now for over four years doing specifically outpatient physical therapy deals with Martin Healthcare Advisors and this is following many years of executing large healthc care deals at Janney Montgomery Scott. Joe brings an enormous amount of knowledge and expertise to the table doing physical therapy deals day in and day out making him an invaluable asset to this team. And so today, what we want to discuss is some of these current market conditions and why our team really believes that right now is a really good time for physical therapy business owners to considering finding a large partner, selling their company.
So guys, ready to dive in? Let's do it. All right. All right. So Tom, give us an overview of the current rehab M&A market conditions and why you believe that now is a good time for business owners to consider selling or partnering with a larger company. Yeah, great. So you know, you think about it, the first eight months of the year, okay, were very strong. You know, we closed seven deals. You know, we have six deals under LOI. When you look at the breadth of buyers in today's market, it's very wide.
You know, in the six deals that we have under LOI, there were six different companies. You know, it's just it's just been great. And so, you know, we there's a lot of pentup demand coming into 2024. You know, 2023 because of the interest rates and the Fed raising rates, and Joe will talk about that, but, you know, there was there was a lot of companies on the sidelines that weren't growing. In fact, they were going backwards. And so coming into 2024, you say, "What changed?" Well, the Fed stopped raising rates.
So your CFO, CEO, [snorts] as long as you know what the rates are going to be, you can factor those into your models, into your valuation models, right? And so once that happened, they kind of capped the there was this increased demand, you know, from these companies. And so, we came we came into 2024, you know, in a good spot and we've been executing ever since. When you think about the next four months of the year, you know, there's a huge tailwind and we're going to ride that right through.
You know, when you when you when you think about what the Fed's going to do, what everyone thinks they're going to do, I think that tailwind gets even stronger in 2025. So, you know, it's a combination of demand. It's a combination of some great companies, right? There there's great companies out there. You know, you still have some larger companies on the sidelines, the Athleticos, you know, and the upstreams of the world, but you know, there's enough people that just filled that vacuum, filled the void. So, when you think about the deals that we've closed and think about the deals that we're closing, you know, it's a strong group of bidders, you know, any every time it's three to five strong biders getting them all there at the same time and there our clients are getting a lot of really good opportunities to partner with great PT companies.
Yeah. Any specific example of, you know, where market conditions really led to a practice owner, you know, deciding to sell and what was the outcome of that example? Yeah, there's a few, but I I'll focus on one because it I think it checks a lot of the boxes and a lot of the goals of sellers, you know. So it was a 30 plus year practice built up, you know, had numerous clinics and you know was primarily owned by the PT that started it, right? And you know, he had some very junior partners that he was, you know, kind of letting in on the equity and so he wanted to continue to grow, but he was 60 years old and he wanted to take some risk off the table and so he was able to do that.
So he took risk off, reinvested, allowed his junior partners to invest, right? So he's pulling back, they're pulling up. And then they have a growth partner who's there. It's going to help them, you know, grow in a more sophisticated way. So, you know, I think I think that's a great example. We had multiple bids on that on that company and you know he as we always you know advise folks you know people culture and he went with you know the people culture and you know they're off to a great start.
Yeah. Now great example great example. So you know one of the things that I've been talking about a lot on you know on these episodes is inflation and interest rates. So Joe, how do now you know the steady inflation rates and the potential and discussions of interest rate reductions impact valuations and attractiveness for acquisitions of outpatient physical therapy companies? Yeah, of course. So look at a at a macro level, inflation rates and interest rates typically tend to move together. Big reason for that being because you know the bank lenders want higher interest rates to really help compensate for any of the decreases in you know their purchasing powers that the inflation rates cause.
So what we've seen over the past year is really that inflation rate has stabilized with it being under around 4% or so since last summer. And the report for August should be coming out shortly as well which I think it's supposed to taper off even further which would be great. So really as those rates steadily rose through 2022 and into 2023, a lot of these major acquirers in the industry, you know, they're heav he heavily levered. And as those inflation rates and interest rates subsequently rose, they weren't able to reliably predict what their cost of capital would be having so much debt on their balance sheets.
So ultimately that really drove the prices that they would be able to afford for these practices. And the subsequent valuations down. So that's a lot of what we saw throughout you know mid22 throughout 2023. However, we think really when this next interest rate potentially cuts which could be as early as the Fed meeting in September that should really have many more acquirers look to potentially re-enter the market really like they have been over the course of this year. So as the interest rates potentially decline, you know, overall interest in the industry should continue to increase as it has the first eight months of the year.
You know, it hopefully should serve as a catalyst for many of the groups who are still on the sidelines. Tom had mentioned a couple of them earlier, but really as we drive these drive the competitiveness for these processes, that should ultimately help improve the valuations for these companies. Any specific example of a practice that you know the value became optimized because of the timing based on economic conditions. Yeah. So go going back a little bit here almost any client really that ended up selling at the market's peak in late 21 and early 22 saw extremely attractive and at some points very unprecedented valuations.
You know, the hindsight's always 2020 here and the M&A process doesn't occur just overnight. So, we never really recommend trying to perfectly time the market for a sale. However, that being said, most or if not all of those companies were really already gearing up for a sale at those times. So, at this point, we're seeing some of those exact market indicators that were present at the time of the last uptick in valuations that we experienced a few years ago. And also with the fourth quarter incoming, that's without a doubt always the, you know, busiest quarter in just M&A activity in general.
So that also means all those acquirers who close deals in the fourth quarter will should be looking to continue to refresh their pipeline in the new year. So, that all being said, it's not a specific example there, but really what we did see a few years ago, we're seeing some of those very similar indicators in the market today. Yeah, Joe, I can still remember you walking into my office after we were getting letters of intent in kind of mid and late 2021 and 2022 and it would always start with you are not going to believe the multiple that was just placed on company.
So yeah, no I could as you said there were many examples in 21 and 22. So Tom, let's talk about private equity. I think you have more than enough experience in private equity to respond here. But you know you've mentioned the significant role that private equity plays in the market. Several private equity-backed companies who are now sponsoring rehabilitation companies and there many of them are approaching that fiveyear mark. How do you see that this will impact mergers and acquisitions in the near term? Yeah. So what you know when you when you just frame it up right so the top 20 companies 14 of them are private equity backed three are publicly traded three are private and so you know the big ones are Athletico and Upstream right and so both of those companies were really negatively impacted by the interest rate increases.
Now when you think about an interest rate increase it's not like you can offset it with revenue, right? It's it's just a pure expense. So you have to offset the expenses to make up you know for the increase in the interest rates. But so you know when you look you look at I mean I think they're stuck for a while. The bigger companies are stuck for a while. I think that you know the whole ATI you know blank check transaction then it's subsequently plummeting you know has got you know Wall Street watching you know the debt lenders aren't happy there right so I think the bigger companies are going to be there for a bit you know if the IPO market opened up I think that you could see you a couple IPOs and then in terms of you know there there's a few companies that are in the market as we speak to do a recap, right?
They don't want to go strategic. They they want to do another recap and, you know, we'll see how that goes. As Joe mentioned, you know, because interest rates, you know, they've come down 200 basis points, right? But but they're still not 200, but they're still, you know, high, right? So, the higher they are, the less debt you can get, which means you have to put in more equity. So, you know, we'll have to see how those companies do in the marketplace because when you recap, it's just not, you know, taking out these shareholders and bringing in these shareholders.
You got to put in some growth capital, right? Because the goal is to double the size of the company, triple the size of the company over the next three to five years. So, but I, you know, hopefully we see that and then, you know, I said the top 20, there's so many. If you look, you know, from 21 to 30, you got five private equity back companies and you got five private companies. And so, you know, they're all very active, extremely active. And so, I think you'll see interest rates come down.
I think, you know, probably three cuts in 2024, you know, so we get out there in 2025. I think you're going to see just a huge uptick in deals. Yeah. Yeah. Yeah. Yeah. Yeah. For sure. For sure. Any example kind of going back at a PE company that recapped and then how the market or what changed after that recap because obviously a larger company came in any example of that looking back? Yeah, look I think one of the greatest examples and one of the really great companies out there in the marketplace is Ivory Rehab, you know, and you know they were owned by like a consortium.
You could call them family offices, wealthy investors. And then I don't know, it's got to be five years ago, they did a deal with Wad Capital. And you know, I think there were like 40 clinics and today there are like 680 clinics. And so, you know, Wad Capital came in and they built out the leadership team, right? Number one, they built out the leadership team, CEO, CFO, you know, IT person, compliance person, and then they grew it, grew it, grew it, right? And then they WAD didn't want to leave, right?
But the investors are saying, "Hey, we want some return." So they did something that's called a continuation fund where, you know, WAD kept some money in and then they brought in other investors to put some money in and then everybody got a little bit of money out and then and then just shortly after that, like a year after that, you know, they did kind of a an offering amongst their shareholders and they raised like another $75 million. Was kind of a genius move when you think about it because everybody else is on the sidelines.
They can't they can't tap the debt markets. And so they're sitting there with this continuation fund equity and the equity that they just, you know, took from their existing investors. And so, you know, they're so active like we, you know, we they're a key buyer in the industry and you talk to them. They're just so busy because while the other guys are kind of fixing stuff internally, they were growing it. So, you know, 40 clinics to 680 clinics in 5 years is pretty incredible. And and they never could have done that on their own.
Yeah. No, they they've been exceptional. And you know, I have my own term for a continuation fund. I call it an internal recap. I know you don't like that, but anyway, for you physical therapy business owners out there, I'm throwing that out as an internal recap, but anyway, so let's talk about operational efficiencies. Joe, look, efficiency in today's market is absolutely crucial. What are some of the common areas? Again your investment banking background as well but I feel like I almost feel like you could treat a patient now with all the physical therapy you've learned but what are some of the common areas where a physical therapy practice can improve their operations and then that hence will make them more attractive to potential buyers.
Yeah. So like the easy answer here is just see more patients and just improve the average productivity of your clinical staff or hire more therapists, increase your volumes. Of course, that's going to increase some attractiveness there. Granted, that is a lot easier said than done across the board, but there are many more common methods that really are just as effective and absolutely much easier to implement. And those really are centered around schedule management, proper coding, unit utilization, you know, all of those ultimately are centered around one theme and that's a real detailed understanding of your existing payer contracts and how you can get reimbursed.
A general understanding of that is going to feed into what those appropriate levers to pull would be to really help grow your practice and improve the optimization of it. Absolutely. And Joe, any practice that you can kind of think back on that implemented multiple operations improvements and saw an enormous or a huge impact to their valuation and bottom line. Yeah, of course. So we have a few that are in market right now and also under some of the groups under letter of intent that Tom had mentioned earlier that really focus solely on schedule management and the coding and unit utilization practices in preparation for a sale.
On average you know those reimbursements improved over 10% for each of those companies. You know that's just by correctly utilizing your existing payer contracts, having the proper clinician education and executing on it. Really there's no need for negotiating new contracts with your payers or you know selling your therapists on higher productivity metrics. Those these results the improved re revenue per visit that just goes directly to the company's bottom line and it I think across the three companies on average it more than doubled the profitability of all of these practices.
Yeah. Yeah. Absolutely. No what our preparatory consulting team can do sometimes you just shake your head. So Tom, Martin Healthcare Advisors, you've been you've been with me almost since the beginning. We have a long history of working with physical therapy companies. Can you kind of detail how Martin Healthcare Advisor Services, particularly the assessment, that outside in assessment that we do, how that helps business owners prepare for their future, whether they want to remain independent or they want to test what we believe is a really strong merger and acquisition market.
Yeah. So, you know, as a firm, we're very unique, right? We have six PTs on staff. And so, you know, if you look at other advising companies, you know, they don't have six pts on staff. You know, if you went to an accounting firm or valuation appraisal firm, they're going to give you a nice 150 page appraisal, but it's not it's not going to really tell you all that much about the real value of the business and then also, you know, what can be done to improve the business.
And so, you know, the outside in assessment, you know, goes starts a lot of things that Joe was talking about. You know, it goes in and looks at every aspect of your business. You know, it's, you know, how do you how do you treat patients? How do you greet patients? How how do you find patients? You know, what kind of marketing do you do? You know, we have proprietary information in our firm where we can say, "Hey, you know what? In Texas, you should have a margin of 22%.
You know, your average cash per visit should be at least $95, you know, etc., etc., depending on the payer mix. But so it's very interesting. So, we go in and we dissect it, right? And it's kind of like, you know, PT doing an eval, right? And so, PT does the eval says, "Okay, here's the things that you need help with, need to work on. Here's your treatment plan." So, that's the way we do it. And and so we'll say, you know, look, your margin's a 15% margin.
It should be a 22% margin. Okay. Why? And and we'll look at productivity, you know, visits per referral, you know, you know, cash per visit, units per visit, and then what are the units per visit, right? And then how you collecting your cash, you know, we take a look, you know, we look at the EMR, we look at QuickBooks. So, it's a very different service that's being provided. And then and then we provide the care of plan the plan of care right and so we say look work with us for six months and these are the consultants right work for us for 6 months we'll get you to that to that level we'll get you to that valuation that we said if you do this and this you get to this valuation and then you and then if you if you like the valuation talk to the M&A guys see what the market conditions are right and you know really put on the table though.
Here's the thing though, Paul. What is it you're trying to get from a transaction? I mean, what is it you really want? And then we can guide to say, hey, you know what? There's a lot of companies that are great fit for you know, or else you might say, you know, what you want may not be there. And so you may not want to go to the market, but 95% of the people say, "Hey, look, I really like what you're saying and I would really like to talk to some people." Whatever the circumstances are, you want to you want to start easing out of the business.
You want some growth capital, but it's very unique and we've been so successful with it, right? And it's just it's as long as the clients are willing to listen and learn, they'll be so successful. And so that that's been really unique for us. And it doesn't matter if it's three clinic business or a 20 clinic business. The business is the business and that's the way we approach it. Yeah. And I keep doing this to you guys, but can you think of a specific case where that outside in assessment then ultimately led to a practice being optimally positioned higher value pursuing and succeeding at an M&A opportunity?
There's so many, right? I mean, there's so many. There there's our friend down in Texas who came to visit us and sat in the she cried in our conference room when she realized when she realized what was going on in her business and said, "Well, where's that $800,000? What are you guys talking about? Where is it?" And we're like, "It's not in your bank account, and here's why." Right? I can think about another Midwestern company, you know, young guy was running it. Two partners that weren't even in the same state, you know, we went in, we did the outside in assessment, worked with him for a year, quadrupled his value, we sold the business, he was able to do a great deal.
His partners are real happy. So, so that's, you know, even the deal I mentioned earlier, you know, where older gentleman wanting to start to exit, he was a client for five years. Yeah. Yeah. And you know the [snorts] Simon Synynic why that's why I that's why I do this. Yeah. That's that's why we do this, right? That that's what gets us, you know, really excited. It's like it's like, you know, w winning on Monday night, right? Winning on a Monday night football game, you know? That's a win.
That's a win for us. 100%. I mean, that's exactly what we say. Is like that's a win, you know, and so it's a it's a unique product and it's a unique set of skills that the firm has, right? And that's what makes us different and to be able to say, "Hey, we're going to take it from here. We're going to hand it off from the PT consultants, right? So so there's so much continuity. We get on, you know, calls every couple months when it looks like they're going to get closer to going into the market, we're on more frequently." And so there's a relationship there, right?
There's a relationship with the firm, right? And maybe some of the other people at the firm, but there's a relationship there. So, it really works well. And part of that whole OIa process, the outside in process is educating them on a deal on the markets and you know, what to think about, you know, what what's realistic. And so when you when you get there and it's at the starting line, you know, they're pretty comfortable. Absolutely. Absolutely. So Joe, we're looking to you to guide us into the future here, right?
So as we're looking ahead, are there trends that you foresee in the outpatient physical therapy merger and acquisition market over the next few years? Where where is this where's this business headed? Yes. So if you were to ask this question a couple of years ago, I would say denovo growth was going to be very high on the list. But going back to an earlier question, inflation has really derailed that strategy for many groups along with just the availability of sufficient staffing for those locations. So I would say if we were to drill down to maybe a handful of main trends across the industry, a lot a lot of these will be centered around overall consolidation that definitely will be continuing over the next handful of years.
But going back to what Tom had mentioned earlier, depending on what the IPO market ends up doing, there could very well be one or two more publicly traded companies in the space, you know, over the next few years. But on the consolidation side, what we're seeing a lot more of is many of these groups that have very large groups that have partner pure partnership models like US physical therapy or Confluent, they're acquiring a lot more directly into some of their larger partnerships as opposed to maybe, you know, [snorts] at that one, you know, at that higher level like they used to.
In addition to that, we're probably going to see a lot more of these private equity rollup strategies. The industry is still very fragmented and there is opportunity there to really create this family of partnerships that doesn't quite exist yet and a lot of private equity groups it's been a strategy across other healthcare services sectors that has been very successful and in the past couple of years alone we've seen a few groups really undergo that strategy and they have been growing very rapidly and you know at very intelligently as but outside of that, we may even see some more midsize players being acquired by national strategic companies.
So with those, you can think about results being acquired by Upstream or Pivot and Athletico, transactions like that have occurred over the past few years. And then lastly, just any there could be potential for some regional players to merge and just create a more national presence as compet competition heats up. So thinking along the lines of there may be a New England centered company that's looking for a mid-Atlantic presence and they acquire a regional group there or someone in the southeast that's looking to expand west into Texas in the southwest.
So just some examples there. We we could see a few of those really occurring over the next couple of years. Yeah, we haven't seen too many of those mega deals over the last 12 to 18 months. But they may be coming. How should folks out there independent physical therapy providers, how should they position themselves to make sure that they're taking advantage of these trends? And if you have an example of someone who was able to take advantage of a shr of a of a trend like this, throw that out as well.
Yeah. So [clears throat] ultimately with any M&A process, operational and financial efficiency like you mentioned earlier, they're going to be key when going to market and just being considered being market ready. A lot of that will come down to just a true understanding of the day-to-day impacts of your business. That's going to lead to a much smoother and ideally growing operation as well as just an easier M&A and diligence process when the time comes. [snorts] looking on the financial side, making sure your financials are just complete, clean, consistent monthly reports that are finished in a timely manner.
So that really means financials that are separated by each of your clinic locations free of any you know personal or non-b businessiness items that can really help identify the actual profitability of the practice and to help identify any potentially struggling locations in your business. And then on the operational side, really keeping track on a weekly basis of like items like Tom mentioned with our OIA, looking at your visits, your eval, your collections, charges, units, what types of units, and so on. Keeping track of those, but ultim ultimately knowing what's going on a daily basis as well.
So, you know, how many visits are coming in across the company by location, how much money is hitting your bank account, what payers are behind, why they might be behind, any other potential revenue cycle issues. Having a good grasp of how of all of these items ultimately will help in any M&A process and just lead for a very smooth transition afterwards. Yeah, absolutely. Absolutely. No, really Yeah. Anyone that really that were preparing to go to market, it's every single one of them that those are the examples.
No, but when you say that it is so true again because as Tom alluded to there's so much that goes into preparing a company for the market. Tom, I heard you say a year for one of the clients. I heard you say six months, nine months. Joe, same thing on your side as well. Certainly there are companies out there that in, you know, 30 to 60 days, you know, they could be market ready, but most companies, come with, you know, some bumps and bruises and, you know, that outside in assessment and then our, preparatory consultants need to fix those and, and move them forward.
Guys, this has been phenomenal. I think you guys have given our audience today an enormous amount of information and hopefully enough information to spur them on to click below, have a conversation with us, and let's talk to all of you about what's going on in this market and how can you best prepare. Tom and Joe, I really appreciate your time today and look forward to talking to you more in the future. Thanks, Paul. Thank you. And for all of you out there, have a great day and we look forward to talking to you very soon. Hope to see you at the private practice section conference. Take care.
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