6 Key Predictions for 2025
An episode from the NEXTLEVEL Owner Podcast archive.
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 I'm real excited to kick off this year with my 2025 predictions for the rehab merger and acquisition market. Now, I've put together six key predictions that I really believe will shape our industry this year. And in today's episode, we're going to cover the first two. And so whether you're running a more locally focused practice or a larger multicl clinic business, these trends that we're predicting are going to affect us all.
So let's dive in. So prediction number one is that private equity activity will rise due to lower interest rates and election outcomes. So, let's start our conversation with private equity because it's going to play a huge role in shaping the merger and acquisition landscape this coming year. With interest rates expecting to continue to decline, borrowing costs are coming down and that is a big deal as it relates to private equity and their activity. And so lower rates make leverage buyouts more affordable, which means private equity firms will have more room to invest.
And physical therapy is and has always been an extremely attractive investment to the private equity world even with some of the headwinds that we continue to face. It's our industry steady growth and resilience that makes us a natural fit for private equity strategy. Now, layer on top of that the election results, and regardless of which side of the political fence you're on, the reelection of a pro business administration is already expected to begin to ease regulatory scrutiny on mergers and acquisitions. That means deals that may have been sitting on the sidelines due to antirust concerns or other concerns could finally get moving.
Experts are predicting that healthc care deal activity in 2025 could top 10 billion dollars. That's a massive opportunity for our space. But here's where it gets really interesting. Whether your company is large enough to be attractive for a direct private equity deal or you're a smaller business looking at a strategic buyer that's already backed by private equity, the result is the same. Private equity, like it or not, private equity is the engine that is driving this growth in this industry. They're consolidating the market, leveraging economies of scale, and creating opportunities for practices of all sizes.
So, that's the good news. The bad news is there are some hiccups right now. A couple of the big recapitalizations, we call them recaps in our sector have stalled, which has created some uncertainty. And of course, I can't name names, but when we even one of those deals gets to a finish line, it's going to open the floodgates in this industry. Investor confidence will soar and I really believe we'll see a wave of activity across the board in this sector. So, what does that mean for you?
If you've been thinking about selling or partnering, this could be your moment. Private equity firms and their strategic partners are hungry for businesses with strong operations, a great culture, and a clear path to growth. And let's not forget, deal structures these days come in all different flavors. There's no onesizefitsall approach and that's good news because it means that you can find a structure that will work for you. Now let's move on to my second prediction. My second prediction is that valuation multiples are going to rebound from recent lows.
Now let's talk valuations. If you've been following the market, you know that the last few years have been a roller coaster. Back in 2021 and 2022, we saw valuation multiples hit alltime highs. Why? Co borrowing gave private equity firms basically free money to play with. That led to fierce competition which drove sky high valuations. But as the economy stabilized and interest rates climb, we saw things cool off in 2023 and 24. We also saw a couple of the large companies have to step aside for a period of time because some of those 2021 and 22 deals did not go as well after they were integrating as they thought they would.
Here's the good news. 2025 we believe and I believe is shaping up to be a year of recovery. While we're not going to go back to those peak valuations of a few years ago, we're definitely moving up from the lows of the past two years. And this is a rebound. It's happening because of a few key factors. First, economic conditions are stabilizing. Investors are regaining confidence and that's leading to more favorable valuations. Second, health care and especially rehabilitation continues to be resilient and a growing sector.
Demand for quality care is not going anywhere and investors recognize that. Now, if you're thinking about partnering or selling, it's important to understand what the buyers are looking for and what they're looking for in 2025. They are being more careful than ever. They want businesses that can prove their ability to weather some of the challenges we see out there today. And that's what we call operational resilience. They're also looking for scalability, companies that can grow without breaking the bank. And of course, margins matter. A healthy bottom line is always going to be a big selling point.
They're also looking for scalability. Companies that can grow efficiently without breaking the bank. Now, once you join a private equity group, you're going to have a big bank. And of course, margins matter. A healthy bottom line is always going to be a big selling point. But here's the thing. It's not just about the numbers. Cultural fit is a huge factor in today's deals. Buyers want to see a strong leadership team and a business that has values that align with theirs. They want a business owner that can tell not only their historic and past story, but their future story.
If you got a great team and a great culture, you're already way ahead of the game. So, let's talk a little bit about deal structures for a second because they're becoming more flexible and creative from some of the new acquirers in the industry. And whether it's the kind of old-fashioned earnout or equity rollover in the local company or in the parent company or in both the local and the parent company or something entirely different, there are plenty of ways to make a deal work for you.
It's like I said earlier, deal structures are like ice cream. There are lots of flavors to choose from. The key to finding the one, the key is finding the one that aligns with your goals. So in conclusion, my first pro predictions of 2025, right? Private equity is going to heat up and valuation multiples are starting to recover. So whether you're looking to grow, partner, or sell, the opportunities are there, but you've got to be ready to take advantage of them. In the next episode, I'll cover two more predictions, so stay tuned.
And if you have any questions about what we've talked about today, just click below and let's talk. Let's make 2025 a great year for everybody in this industry. Thanks and let's have a great day.
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