6 Key Predictions for 2025 To Shape Your Growth Strategy: Part 2
This week, Paul continues his series of predictions regarding trends most likely to affect owners in 2025. Find out how you can take advantage of these insights to grow your business and prepare for a partnership.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good morning 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 excited to kick off this year. I know we're into February now, but I'm excited to kick off this year with my 2025 predictions for the rehab merger and acquisition market. I've put together six key predictions that I believe will shape our industry this year as it relates to mergers and acquisitions. And in today's episode, I'm going to talk about the third and the fourth predictions that I have.
So whether you're running what we would describe as a more locally focused community practice or a large multic multicl clinic business, these trends are going to affect all of us. So let's dive in. All right. My third prediction is this. Owners not staying involved post sale will become the exception in this industry. So, what do we mean by that? Well, what we're saying here is that you someday will need to make a decision when you're taking your business into the market at whether or not you're going to be willing to stay on with the acquirer.
And in this current market, what we are seeing is that p the private equity firms are very nervous when they are looking for their sponsored company doing an acquisition of a business where the owner wants to you know so-cal sell and get out. They have seen too much risk in that and they these companies are very risk adverse. So what do we do if we are a seller and we just want to get out? I would really start looking for what we would call a successor.
Someone among the people that you have now that you could basically train that could some at some point in time replace you. So then when you go to sell the company then you look at a transition where that individual will essentially take your place. That's the way in which you can stay in the game if you're not willing to stay on. But we believe that in 2025 more and more companies are going to be looking for sellers with business owners that want to stay three plus years or more.
And in many of these the goal is to leverage the expertise and to drive growth and ensure a smooth handoff you know post that three years acquirers are looking for businesses that can grow not businesses that want to remain stagnant. And if an owner is willing to stay on, that triggers an acquirer to believe that this is a business that wants to continue to grow, not just to the acquisition, but through the acquisition. Again, for buyers, having the original owner remain involves several advantages. Several. You know the ins and outs of your business better than anyone.
You know, you know, the doctor around the corner expects certain things and in your, you know, north location, they expect certain things. Only you know that. So, your continued presence helps maintain stability. It ensures staff and patient experience will have as little disruption as possible. The culture that you've built is a big part of what makes your business successful. The acquirer is buying that culture. So staying involved helps to preserve that culture which is absolutely critical for longterm success. So your deep knowledge and relationships are simply invaluable.
Buyers recognize that your expertise can help guide the business through transition and beyond. Now, let's talk a little bit about you staying on with an acquirer because, you know, many business owners have a very you I think a false impression of what that looks like. You know, a common way to structure this is involvement through what's called rollover equity. So, instead of cashing out entirely, you reinvest a portion of your sale proceeds back into the company. So now you become an owner moving forward. It often results in an ownership split where the large company the strategic company holds maybe 70 to 80% and you retain 20 to 30%.
Now keep in mind these strategic companies these are strategic acquirers the large majority of them are backed by private equity. If you're a company that has two and a half to three million plus of bottom line EBITDA, you may have the opportunity to go straight to private equity, which is a very similar 7030 8020 type of split. I just don't want to confuse you that this only means going straight to private equity. This is done with strategic acquirers all the time. So this kind of setup aligns the interest of both parties.
For buyers, it reduces their initial cash outlay and ensures that you're motivated now to help the business succeed since you still have what we call skin in the game. And for sellers, you get an immediate liquidity event from the sale. That's stage one. And then the opportunity to benefit from the company's future growth. You know, it's like we all, you know, we've coined this phrase many time. It's your second bite at the apple. And in our field, many practices again have deep roots in their communities.
Patients trust you and the team relies on your leadership. And if you were to leave abruptly, it could create uncertainty and acquirers don't like uncertainty. They want someone involved from the beginning trying to maintain and accelerate their growth that's going to be there for that second bite of the apple. You know, studies literally have shown that deals involving rollover equity lead to better outcomes for both parties, not only the buyer, but the seller. Sellers often achieve higher total returns. And this is from studies. Buyer benefits from the con continuity and sustained performance of the business.
It's a win-win situation that has become increasingly the norm for middle market private equity deals as well as seeping down now through those strategic buyers to local company deals as well. So, if you're considering selling and staying involved, it's important to define your future role really clearly. And I think this would be a second prediction that those that are willing to stay will have better deals that those that aren't. And those that are willing to clearly define what role I could play in the future will also outperform those that do not.
So you got to be prepared and ready to outline how you can ignite growth and develop a plan and achieve it and then find the right acquire to help you and to support you in achieving that. Understanding the very specific terms of this rollover equity arrangement including the risks, the potential future returns, how and when you get it back, what implications are there, what costs can be put on that is all really involved. But it's really important. You want to ensure your vision for the company's future that it aligns with that of the buyer to kind of set the stage for a successful partnership.
You know, and we understand that not every owner wishes to remain involved postail and we talked to many companies. Typically they are smaller companies but not always and the owner is looking to get out and wants to exit as quickly as they can and there are still options available depending upon the size and the structure of your business. Typically these types of deals may come with slightly well no I shouldn't say slightly. These are going to come with lower valuation multiples compared to partnership arrangements. And in these cases, it's crucial to have a succession plan in place for yourself.
You want to identify who will take over for your responsibilities. Ensure that, as I said at the beginning of the episode, ensure that they're prepared to lead. This pro kind of proactive approach not only makes your business more attractive to buyers, but it also facilitates a smoother transition. So again, if you're out there today and you're hearing this and you want to exit your business quickly for a variety of reasons, there are still opportunities out there for you, but there are less opportunities and the multiples will absolutely be lower.
So let's move on now to prediction number four. Prediction number three was a big one. But in prediction number four, I'm predicting that more effective innovation that actually boosts cash flow will mean a higher value. So, let's talk about another significant trend that we're seeing, and that's the increasing premium on innovation and operational efficiency. Notice I said premium. That's good. Rehab companies that have integrated innovative solutions are becoming prime targets for acquisitions. But it's not just about having the latest technology. So don't worry, you don't have to run out and start grabbing all this technology.
It's about implementing these tools and processes that drive efficiency, enhance patient care, and ultimately will boost your bottom line. And there are those products and services out there. So let's just take artificial intelligence for example, okay? AIdriven documentation tools that can streamline admin administrative tasks, reducing the times clinicians spend on paperwork and allowing more focus on patient interaction. This not only improves operational efficiency, but this also enhances patient outcomes, making your practice more attractive to investors. What you want to be careful though is we don't just add AI and not reduce expense in any other way and not re improve our efficiencies.
The key is driving efficiencies which would drive more dollars to your bottom line. You know another product AI enhanced home exercise programs can it can really provide personalized rehabilitation you know home exercise plans. It monitors patient adherence and adjusts exercise based on realtime feedback. This can lead to improved recovery rates and higher patient satisfaction. And that's something we all want and drive for. Again, it's really important though to choose your innovations wisely. The goal is not to adopt the coolest new technology for the sake of, you know, just implementing solutions that address specific needs in your practice.
It's reducing and whether or not I'm sorry I apologize but whether or not it's reducing staffing challenges or it's attracting retaining talent or it's improving cash flow the right innovations can make a significant difference. Do your research. Watch many of our shows. We're doing a lot of shows with the innovators that are out there and there are a lot of them. Private equities, equity firms literally have teams of analysts who will assess whether you're you've implemented technologies that are truly adding value. They look for evidence that will take these tools that are enhancing efficiency, improving patient outcomes, and contributing to financial growth, and they will put them through the test after test after test.
So, it's crucial to demonstrate how your innovations have made you more attractive in this market. And again, incorporating effective innovations can also make your practice more appealing to potential buyers. Investors are looking for businesses that are not only performing well today, but are also positioned for the future and for future growth. And by showcasing your commitment to the right innovation that is driving operational efficiency, you're signaling that your practice is forward thinking, ready to thrive in an evolving healthcare landscape. So in summary of these two predictions, staying involved post sale and focusing on meaningful innovations are key strategies in today's merger and acquisition market.
Aligning your goals with those of the potential buyers and implementing tools that drive efficiency and improve patient care will enhance the value and appeal of your practice. Again, I really appreciate you tuning in today and stay tuned for next installment where we're going to be focusing on predictions number five and number six. And if you have any questions for our episode today, feel free just click below and let's talk. I look forward to talking to you in the very near future.
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