M&A Expert Weighs In On Market Uncertainty
Our series continues with Paul Martin interviewing AJ McDeavitt, Vice President of Mergers and Acquisitions for Select Medical. AJ offers his seasoned perspective on where the market may be headed in these turbulent times.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello and welcome to another episode of Paul Martin's Crucial Conversations. I'm Paul Martin, founder and president of Martin Healthcare Advisors, and our episode today is titled Clarity Amid the Chaos. What rehab owners need to know and need to know now and to help us on what you need to know and need to know now. I am thrilled to be joined for the first time by AJ McDevitt. AJ, thanks for joining us. Paul, thanks so much for having me. I'm excited to be here with you today.
Awesome. Awesome. AJ is the vice president and this is a long title of mergers and acquisitions as well as strategic investments and corporate development at Select Medical. AJ is a Penn State grad and also received a master's of fini finance from John's Hopkins. And AJ has been with Select Medical for nine years. Select Medical as you all know very large publiclyowned healthc care company. It's based in Pennsylvania. Select owns long-term acute care as well as impatient rehabilitation hospitals as well as occupational health clinics. But what most of you know about Select is because of their 1,925 outpatient rehabilitation clinics that operate nationwide.
Well, AJ, let's dive in. Let's do it. All right. All right. So, obviously the election is behind us. Lot has been happening. Trump is back in office. How would you describe the M&A outlook for the rehabilitation outpatient industry for 2025? Are are we feeling more optimistic, more cautious, and why? It's a great question, Paul. I think you know our experience as you said growing our clinic footprint as we have over the years we focus a lot on you know smaller acquisitions really focused on contiguous markets where we have a presence across the country and we've got great leaders in place.
We're always looking to add to our presence through culture, through clinical outcomes, through best-in-class practices. And you know, heading into the end of last year and into the election, things from our perspective really slowed down. But I think once we got into Q1 here, we have really noticed a pickup in deal activity. And we have had a few acquisitions we've closed so far this year. We've got quite a few in the pipeline. I'm sure you know this with all of your clients. Folks seem to be looking out to the next four years and we've got some got some indication on where things are going to go.
A lot of challenges remain. But I think now that we have some clarity and certainty around what the you know with the election over folks are starting to get their things in order and come to market. So we have noticed an uptick here heading into Q2 with some more deal flow. Yeah, that's great to hear. Really great to hear. You know, recent recap efforts as you know and this has all been public so I'm not saying anything that has not been in the public eye. Recap efforts Confluent H2 Health you know they've been stalled.
Mhm. What do you think this is telling us about the current investors and you know the appetite that they have for bigger deals and you mentioned smaller deals. How do you think that weighs in on this market? Well, you're right. I think we we've seen, you know, across the industry quite a few challenges with some of the larger players. They grew significantly kind of out of that postcoavid time period and we competed alongside of some of them that you mentioned and others that you have not mentioned.
But I think with the rate environment that we're in that has certainly challenged some of these organizations who levered up to grow their businesses. We'll get to it in a bit, but I'm sure we're going to touch on some of the staffing issues and shortfall of air, some of the Medicare cuts and some of the other payer dynamics that we're all focused on and battling with day in day out. So when you look at those processes in particular, I think from a very large standpoint, a lot of the institutional investors who would be kind of next in line to acquire large assets like that are taking their time and letting multiples adjust to where the market demands.
So we'll see where those go. But I think the bigger the deal the more challenges, especially when you factor in some of the leverage that that's in play. And you know, we've got a Fed meeting this week and where does the where does the 10-year Treasury ultimately go and how's that impact borrowing costs and so on. All of which are top of mind not only for us but also some of the competitors and the buyers who would be in line to acquire these large assets. So, so I what I feel like I hear you saying is that there is some uncertainty certainly among you know what's happening you know economically etc from these large PE groups and so some of these larger deals may be you know at a standstill or you know kind of trekking through the mud whereas smaller deals call them tuckins call them you know new market opportunities and markets you're in those seem to be still moving forward similar to what we've seen in the past.
You're exactly right. I think there there's still an abundance of opportunity out there across the country. You know, we our portfolio is rather diverse. We touch most states not all. Some more challenging than others for sure. But you're exactly right. I think when we look at the smaller deals call it that one to six clinic acquisition opportunity there are quite a few out there and you know those are the ones that we're really focused on adding to the portfolio through acquisition and they tend to be in our experience just a bit easier to integrate you know you get that cultural match across markets where we already exist.
We can leverage our leadership, we can bring on new talent, new leaders through acquisition. So, we're really bullish on that segment of the market. And then as larger deals come across, call it regional players, some you know, maybe 10 to 30 clinic opportunities, rather rare in this in this environment, but every once in a while we get a good look at a at a decent opportunity. There's some really nice ones out there, but I think they're more selective in this environment and really ensuring that they are timing their exit according to an attractive market and outcome whether it be multiple etc.
Sure. Sure. I'm going to use the t-word that we're hearing a lot. So, all you got to do is turn on the news, but with the new tariffs in place, obviously some inflation concerns, you know, waiting to see, you know, what the feds are going to do next. How do you think these pressures are impacting deal volume or deal structure? You know, some higher debt costs. Does that change the way buyers approach acquisitions? Yeah, I think it certainly is a factor in the thought process and when you're weighing your global macro inputs into these deals, it's certainly something to consider.
A lot of volatility here recently in the past couple months since Liberation Day, right? So, I think folks are definitely taking their time, want to understand where things shake out. You know, but Paul, at the end of the day, I think folks who have determined that now is the time for a variety of reasons. You know, we can get into it. I hear from sellers, you know, weekly through our discovery calls around their reasons to sell and I don't know that, small macroeconomic blips are really going to influence their decision making.
So it's less you know the tariff thing is less of an input in into our acquisition strategy but at the same time we give it credence and certainly weigh that amongst many other variables in our investment analysis. Sure I don't think we're getting a lot of parts from China to you know add onto our PT clinic. So I shouldn't see how tariffs directly would impact but yeah you do hear a lot. How about, you know, with the new administration and their quest to ease some of the regulatory pressures on health care deals, how do you think that might affect consolidation strategies in our market?
Well, I think it remains to be seen what what's ultimately going to come about and come from Washington? I think you know, we deal, as I said earlier, in many different states and you know, think about Medicaid as an example. Some of the different dynamics at the state level, at the payer level, whether deregulation across the board from CMS on down is ultimately going to come to pass. It's something we're all going to wait and see. But right now, we look at state specific issues and determine our go forward strategy there.
But certainly deregulation and some collaboration w with the payers would be a welcome development. Sure. As we look to grow the business. Yeah. And and kind of now moving towards you know private companies and their timing decisions. Always, you know, we're always involved in, you know, when is the best time. You know, would it make sense to kind of wait for the corporate tax cuts and potentially lower capital gains rates? Should those be factors in a decision, a timing decision? From your perspective? I think it depends on each seller, each owner, and their, you know, personal place and journey along the continuum, right?
A lot of we deal with entrepreneurs as you do. These folks have spent their lives, you know, ve very impressive individuals. It takes a lot to be a you know established and accomplished clinician and also an entrepreneur and business owner, right? And these are the folks that we're dealing with. So, I think yeah, absolutely understanding what what's going to hit the bank account at the end of the day and how that that's going to be impacted. It's definitely a consideration. We talk to folks about that.
But I think big picture when these individuals are ready and have got the business to a point where it has scaled it it's to the point that it it's sellable. It's got you know some really attractive dynamics. I don't know that waiting for those changes is going to make or break the acquisition. So, from our standpoint, I think we certainly take that into account. Every once in a while, we'll come across somebody who's, you know, kicking the tires, really wanting to understand the process and waiting for some things to play out.
But, more or less, it's really, hey, I built the practice. We've gotten to it to this point. We're looking at exit strategies and, like to think about, transacting. So, definitely each seller, each owner needs to take into account their own personal situation, but more often than not that that's sort of back of mind in our interactions. Yeah. So, it sounds like your advice is whether it's changes in rates or changes in laws or, you know, that if you're ready and your business is ready, there's no reason to wait for some of these economic changes to occur.
If you're ready, now is a good time. Is that paraphrasing? I think you're absolutely right. You know, and Paul, we deal with you and your team quite a bit. You do an excellent job of getting folks up to the point and prepared and established and ready to go to market. And you know, at the end of the day, if in fact we do hit some turbulence, you know, I like to think of it as kind of the IPO pipeline, right? The volatility might spike and IPOs get pulled, but you know, two three months later they go back to market.
And I think that's very consistent with the small business owners that we deal with and going to market, right? It's it's if something happens, they can certainly pull it and revisit it you know, a month later, a quarter later, what have you. But I see no reason if the business is established, you've put all the performance improvement practices in place, all the value creation has been achieved, you know, going to market, a quality asset's a quality asset, right? And we're buyers of quality assets with longevity and you know, room to grow, upside opportunities.
So I think the small blips on the radar coming across the macro environment would not influ influence us significantly one way or the other. Yeah, good stuff. Good stuff. If I didn't ask this question, you know, th those listeners out there would be, you know, you got to ask the multiple question. You know, are the mult are valuation multiples are they holding up? Have expectations cooled and are there any creative deal structures that you might be using to kind of bridge the gap between buyers in this current industry and sellers?
That's a great question. You know, I think that multiples have certainly come back a little bit from that postcoavid ramp that we had all seen. Excuse me. But at the end of the day, thing things have certainly changed. Some I think top of mind for us is really the staffing pressure and ensuring that you know businesses and clinics that we buy are going to be staffed and we're going to have a team in place to continue to build upon the legacy that the seller had built.
So in my mind it's really about ensuring that we have in line expectations when we go into these transactions. And what I mean by that is you know seller are you going to stick around for a period of time or are you looking to sell? I think some of the best advice I would give having seen quite a few of these transactions is really around a built fully built out team, right, with a seller who understands what exactly it is that they want. Because when we can reach a common ground with a seller or with a business owner and they want to, you know, leave in two months, six months, eight months, we can deal with that as long as we know that upfront and the team is built up behind them, you know.
So in that same vein around deal structure and some of the things that we've done to address that historically we've been very interested in doing 100% acquisition. I think that has changed a bit maybe not so much to you know reflect what some of our competitors do. But we've become more dynamic in our approach and have taken on some a different thought process around minority ownership and a structured buyout installment sale type of approach just to accomplish everybody's goals. So I would say that is the one thing that has changed given the macro environment that we've been in here for the past couple years.
AJ, that's that that's noteworthy news. That is noteworthy news. And everybody out there that's hearing this, if this is the first time you've heard it, this is probably not the first time I've heard it. Our our group has come back and said, "Hey, you know, Select has some interesting models that they're considering." so I appreciate you bringing that out and I I'm hopeful that, you know, we'll be able to come together on some of those. You also touched on, you know, how sellers, partners that you guys are seeking, how they should be preparing themselves and you talked about, you know, making sure you're fully staffed.
Two questions. One, you know, confirm for us how important is that? And second, how do you think this, you know, nationwide shortage PTS and PTAs, how do you think this is affecting the M&A market? Great questions. I think, you know, in terms of being fully staffed, that that's something for us that is paramount, right? It's it's very difficult. As you know, Select has done an ex extreme well, a great job over the years of really building up our recruiting efforts, our retention efforts, our education, our clinical team.
You know, we have a lot to offer. I think we leverage those assets the best we can not only in acquisitions and hiring and so on. But it's incredibly important and we try to do the best we can to align incentives out of the gate so that these newly acquired team members feel part of the family and feel integrated and valued from day one. You know, so the second part of the question around staffing and recruiting efforts, I think it definitely plays into valuation, right? It plays into the entire piece.
I mean, we put a premium on deals that have a built out established team. You know, we're less excited. We we've reworked our entire framework around acquisition coming out of the COVID pandemic and are really focused on not just putting dots on the map and acquiring clinics to build out our existing footprint, but really ensuring that we've got adequate staff in place to see existing patients, but also grow into the community and expand our services and absorb additional capacity. So that that's something we're very focused on when we're looking at acquisitions.
You know, let's call it a single clinic seeing 30 or 40 a day with three to five clinicians. That's that's attractive, right? And I think there there's some upside opportunity there, especially if those folks are tenured and have been with the practice for some time. That that's much more attractive for us than you know, a seller single clinician with PTA the clinician wants to sell and step down. It makes it very difficult because how are we going to backfill that as I'm sure you're well aware.
Yeah. No, absolutely. Yeah. Yeah. And really helpful. So giving advice to smaller companies out there what do you think the most effective way potential partners can keep this shortage from limiting their attractiveness to buyers? I know you say having, you know, being fully staffed, but is it an internal program? Is it professional recruiters? Are they playing a larger role now? What are you guys seeing as advice for some of these smaller companies to be fully staffed? Because I'm sure you'd rather find them fully staffed and pay for them than understaffed and having to build back, right?
You're you're exactly right. We would certainly want to see that fully staffed compliment at acquisition. And I would say that and it's highly competitive as we all know, right? Whether it's competition from the health systems, competitions from other players. It's very tough to fill that staffing roster. And we have seen an uptick in you know utilization of placement agencies and some of the other staffing resources that are out there. But I think what really some of the most successful acquisitions we've done when we look and do our due diligence, it the practices that have that team that culture of, you know, we're here to do the job and everybody's going to win.
That those are the ones that really attract us. That there are certainly some that have you know long tenur employees and some that are you know quite a bit of new grads which is totally fine but having that hybrid and just some semblance of continuity there is certainly reassuring to us I've seen a lot of folks doing some different things really getting back to their roots and trying some innovative programs with the PT schools out there and some of the programs to get these folks in, get these kids in, these graduates in to back fill and start them early.
So, we did an acquisition recently that had a lot of undergraduate interns and so on that have come through. And you know, the success stories of keeping these folks and bringing them on as full-time employees when they're done with PT school and so on is you know, it was proven for this particular practice. It worked very well. So, I think it just goes back to the to the basics really creating those relationships, demonstrating to the community. PT is a people business, right? It's a lot of word of mouth and driving and creating that successful practice is a function of the talent that you're able to bring on.
And I think what I heard you say that is, you know, making an investment in that culture. You mentioned culture and I can't tell you how many companies with real positive cultures don't seem to have the significant challenges that some companies who have not made that investment in culture. So really great point. Yeah, absolutely. I think for us it's catering to those folks, right? Giving them opportunity. You know, we're very fortunate with our footprint and with our different specialty programs. We've got something for everybody which is nice as an acquirer.
It's it's a nice part of our pitch. But also our employees, it gives them a lot of exposure, a lot of different experiences and whether they want to focus in a certain specialty program or they want to get into upper level management and work their way through. That that's something that is very much value add from a select standpoint. Absolutely. Absolutely. AJ, you have been absolutely awesome and have given our listeners just an enormous amount of value today. Some real helpful thoughts. I really appreciate your time today and you did such a good job.
I'm going to be calling on you again. So AJ, thank you so much for joining us today. Paul, thank you so much for having me. I I'm glad to be here. I think you and the team do a great job and really looking forward to catching up with you here soon. Thank you. And for any of you out there that have a question for myself or AJ, click below and let's talk. Have a great rest of your day and have a great weekend.
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