What Owners Need To Know Amidst Increasing Uncertainty
Our series continues with Paul Martin talking with Richard Leaver, CEO of Alliance PT Partners, about turbulence in the current PT market. Richard offers practical advice for rehab owners navigating a complex 2025 landscape.
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 I am so happy so many of you have joined us today. Today's episode is titled, and I think this is very fitting for where we all are, clarity amid the chaos. How and what rehab owners need to know now. And to help us understand and get some clarity amid this chaos, I am thrilled today to be joined by Richard Leaver. How's it going, Richard? Very good, thank you.
Very good. It's great to have you again. Richard's a physical therapist. He's also the CEO of Alliant Physical Therapy Partners. He has a long and decorated career in physical therapy going back to his days with Physiootherapy Associates as well as ATI. And he graduated from I'm not going to say one of the best. I'm going to just say the best university in the world, the University of Michigan. Well, thank you so much. It's great to be here. I'm not sure how much clarity I can bring, but hopefully I can assist in the journey, shall we say.
Ah, you you've been you've been an ace every time you've been on. Just a little bit about Alliance. Alliance, private equity-backed physical therapy company headquartered in Grand Rapids, Michigan. And as of 2025, the company operates over 130 outpatient clinics encompassing 15 distinct brands. So, Richard, let's dive into this. Absolutely. Looking forward to. All right. So, [sighs and gasps] election is behind us. I don't know, it's well over 100 days now. How would you describe the merger and acquisition outlook for the outpatient rehab industry in 2025?
Is there more optimism or is there some cautiousness? And why do you feel like either one of those are the trend? A really good question to kick off with and I don't think anyone's quite sure to be honest. I don't know if we're coming or going. It depends on the latest tweet, doesn't it? To a certain extent. What I will say is there's increased uncertainty and any business regardless of whether it's health care, PT, non-healthare don't like uncertainty and change and it's very unsettled. So really I can think a lot of people are waiting with baited breath to see which direction it's likely to go.
And you know it's a bit like trying to time the stock market. You just never know quite do you? But I think the ultimately I think 2025 will be very if I if I kind of read the tea leads and based on what I've seen year to date which is limited I think it's going to be very similar to 24 specifically to the outpatient M&A market. Obviously we need to take into account the political and macroeconomic factors, but really I think what's more important for your listeners and for private practice owners is really looking at the at the business level.
Those factors have in the past and continued to probably have more weight than any macro factor that we're really discussing. So inside these physical therapy practices as well as inside obviously the acquires having more influence than all the things around us that we have very little control over. Absolutely. You know there's always some major or some macro issue going on be those taxes be those regulatory etc and really the valuation the business is primarily dependent upon is this a good business or not other than this noise outside.
Yeah. And you know some of the larger companies and they're public with this so I'm not saying anything that's private but you know their recap efforts you know Confluent H2 Health seems to have stalled. What does that tell us about current investors and their appetite for the big deals and what do you think is the appetite for smaller deals right now? Yes, obviously you're not privy to specific kind of conversations. If I was, I'd probably be under an NDA. But I think what I can say is I think sophisticated investors of any size are becoming perhaps even more cautious over time conservative than perhaps in the past certainly in the you know 2010 20 2011 time.
So it's really all to do with essentially risk. And in the past I believe that entities were prepared to kind of put a valuation that was based off faith rather than perhaps hard numbers. And I think there's suddenly been entrenchment back by investors between this kind of perception of what it's actually worth or calculation of what it's worth versus the perception of sellers of what they're worth. We're really talking about kind of adjusted EBIT and I think any entity that is trying to sell based off a large adjusted EBITER is likely to experience problems with valuation and sale.
Sure. Sure. And you know, you mentioned uncertainty and I think, you know, we saw a lot of that in 2023, you know, coming out of the glory days of 21 and 22. And so you would, you know, you would assume that, you know, larger businesses buying other really large businesses are going to be a little slower when there's, you know, huge investments. How about for smaller deals? Are you seeing acquirers kind of pulling back on smaller deals as well? I think there's u sometimes, but I think what's really happening is there's just more due diligence being applied.
If you are like always if you are selling an entity that is robust then I think there is still a significant number of potential acquirers that are interested in the business. But certainly the days of just essentially multiple entities bidding up valuations and chasing after what I would say is probably assets that really didn't deserve the type of valuations that they achieved. I think those days are over. You know it essentially all follows h how much debt costs. You know the more the debt costs then essentially it could be one of three things that occur.
Either the valuation is insufficient to even allow a sale to occur or the the entities accept a lower price or there is some sort of creative structure with regards to the deal to allow the value to be realized over a period of time hence spreading the risk between the buyer and seller. Yeah. So, you mentioned higher debt costs certainly having an impact on valuation. I got to use the T-word, you know, tariffs and inflation, potential inflation, I should say. How do you think that's those pressures are impacting deal volume as well as deal structure?
Yes, that's a great question. A board member asked me a very similar question the other day. Actually I think with regards to tariff is just too early to tell. And then with regards to you know other inflationary pressures in fact as we know infl the rate of inflation has come down significantly compared to I think about 18 months ago two years ago. It's still stubborn but it's less and interest rates have come down somewhat. It looks as if they're going to be a little bit sticky, but from a from an inflationary concerns, I think we're in a better place than we were.
So I think there is in general perhaps we're in a slightly better place for deal volume in that respect, but there's still that unknown. It could easily change on a dime with regards to interest rates. There's no there's a possibility that they could go back up. There's a possibility of a recession. And then there's obviously the employment issues associated with outpatient therapy as well. So they're all factors that we're not quite sure how they're going to play out at the moment. Yeah. Yeah. In terms of timing for you know potential partners or sellers, do you feel like deals are now taking longer or are some being pushed a little faster in anticipation of some of these changes?
What advice would you give sellers thinking about timing? From my experience the really the size of most entities that are being purchased or partnering with new entities are such where really these bigger questions aren't necessarily so relevant. So, so with regards to the duration of which to you to sell an entity, it's really more dependent upon the seller. So for instance, you know, how quickly can they get all the necessary documentation together for it to be reviewed during diligence. That's much more likely to actually impact the amount of time it takes to achieve a sale process than anything perhaps at a macro level that I've seen.
So, you wouldn't give somebody an advice right now? No, wait and see what may happen with interest rates or wait and see. Your advice would be if you're ready, take your business and give it your best shot. Yeah, I'm always of the opinion that you sell when it feels right and when the numbers specific to your business are appropriate. I think it's very easy to get buffeted around through external factors but if you if you try and time it does it's very rarely does everything kind of come together all at once.
So the perhaps the negative impact associated with external factors is usually a lot less than any impact that the owner can have on their business by pulling certain levers. So really external factors are distra ex factors are a distraction. It's really important that the owners focus on their business and pulling the appropriate levers to optimize that rather than worrying about other factors on and how it impacts valuation. Yeah. And is your sense that there are a lot of active buyers right now? And what types of rehab companies seem to be most attractive in this current market?
You know, has your profile changed on what you guys are really looking for. Yes. With regards to the number of active buyers, it's interesting. I think it has changed somewhat. There are still plenty of buyers. But if you actually look at the data, the buyers that are active in 2025 aren't necessarily those that are particularly active compared to say 2023. So the buyers have changed and I think the investment philosophies have definitely changed as well. But but ultimately they're asked it is still a very attractive space and there should be if your if your business is doing well then and generating profitability and has value then we should still see a competitive process and a robust valuation probably less than what one anticipated expected in the past but still what I would say still a very fair and reasonable valuation.
So I was going to talk ask about valuation multiples. You you're feeling like valuation multiples are holding somewhat steady. I think it's very difficult to talk about it because every entity is kind of a separate conversation. When you look at the larger entities, the multiples are still somewhat depressed relative to kind of 20 10 20 sorry 20 2021. Yeah. But they are they're certainly not going down any further. I think that's again its reflection of the price of the cost of money. So debt. If the interest rates could go back up, then I'm sure that will have an impact.
So, so really it does track pretty closely to the cost of debt. So that that's where my head's at with that. Yeah. Yeah. So, what advice would you give a potential seller on how to position themselves for, you know, the best deal? Are there any mistakes or, you know, I'm calling them blind spots that you believe sellers are not focusing on? Yes, I think there's really three things the sellers need to focus on. Again, it's the same as any time, but I think it's perhaps more so based off the challenges we have in the space.
First off is there's that saying, is it no mission, no margin? Well, you know, if there's no margin, there's no value. And there are a lot of practices that's that are not only necessarily underoptimized but certainly you know not generating significant profitability or any profitability of any value or significance. So so first off is you have to have a margin to be worth anything. And then there is what I call a normal margin and ideally you know you need to be operating within certain financial parameters to generate certain level of profitability which then indicates a well-run business.
Then the next thing I think is you need to do is when a when somebody is buying a business they're essentially buying future profitability and value. So you have to make sure that you set your business up in a manner that can not necessarily guarantee but strong likelihood that going forwards it at least sustains if not actually improves its financial position and viability. So it's important to adjust your care model to make sure that the business is becoming and will remain a financially stable entity. And then lastly, it's really being able to provide accurate and timely financials.
I can't I can't tell you the number of times that we get financials as literally photo photographs of pieces of paper. You know, that what that does though is really it again puts the seller on not, sorry, the buyer on notice that things might not be what they should be based off the the business, but also it really undermines the seller's capabilities of commanding what I would say is a fair valuation as well. Sure. Sure. All right, we're going to jump into a little bit of a different lane now.
You know the nationwide shortage of PTS as well as PTAs, how does it affect the M&A market in this industry? Yes, it's interesting. I think it affects it in a couple of different ways. So the larger entities or in fact you know I think any entity to grow and to grow effectively has to grow in different ways and that's combination of organic growth combination of building new bricks and mortar and then and then thirdly through acquisition of new partners or partnering with new entities and certainly with staffing challenges it's made the first two of those methods for growth very difficult.
So you've definitely seen a number of entities pivoting proportionally more towards M&A activity in order to be able to demonstrate and achieve ongoing growth. But on the flip side though the staffing challenges are impacting the sellers with regards to their ability to sustain or maintain their employees and recruit more to be able to grow. So, we're definitely seeing pressures on sellers financials because of the staffing shortages and then that either kills a deal or certainly reduces the valuation of the sellers's entity as well. So, it's kind of impacting both sides.
Yeah. Yeah. What do you believe is the most effective way that potential sellers can keep this shortage from limiting, you know, their attractiveness to a buyer? Is it professional recruiters? You know, do they seem to be paying a bigger role for sellers that you're seeing out there? Yeah, I think there's quite a lot that sellers need to understand with regards to staffing and with regards to making sure that this shortage doesn't impact their ability to sell and also the valuation. I think there's a number of things I say.
So the first one is I think it's more than ever there is an expectation a lot of times for the seller to remain with the entity for a period of time and oftentimes an extended period of time after the sale of the entity to a to a buyer and that really gives a lot of comfort. And for instance for some entities there really is no value to the entity unless the seller stays for a period of time. The other thing is the seller needs to really make sure that their team is tucked in.
As I said before, really you're buying an entity with ongoing value and profitability and that the majority of that is really tied up with regards to can you maintain the staff clinical staffing level. So, so it's really incumbent upon the seller to make sure that there isn't an exodus of clinical staffing once the purchase has gone through. Sure. And then lastly, I would say it's really ident the seller identifying individual clinicians within their entity prior to selling who would be able to you know step into their shoes.
So really looking at succession management. Succession management isn't just for the larger companies. I think it's vitally important for a seller to have that plan. It might not transpire, but certainly have that plan to give buyers the confidence that the entity is viable in the long term. You know, you mentioned that you know, you want a seller wants to make sure that their staff doesn't you know, flee after an acquisition. Do do you find when you guys do you know whether they're small, medium or large acquisitions that therapists are going elsewhere because you the company has partnered with a larger business.
So I think there's two factors. First of off is most important is culture. There is a cultured strategy and if the culture is the same or similar sufficiently similar between the buyer and seller then I don't think there's necessarily an issue with clinicians leaving. The other factor which is really important is how the seller, the owner of the entity being sold behaves, acts and positions themselves to not only the acquiring entity but actually to their employees as well. Usually there has been a lot of time spent with their team and the team is very sensitive to any change.
So they will definitely follow the sellar with regards to the mindset and how they how they feel and behave as pertains to the change. Yeah. Yeah. Richard, that is so needed. And so important for folks to hear. Because I think that is that is the key is when you as that former owner, if you're constantly pointing this way and saying it's their fault, no, it's us. It's us and we're working with them. And, I think that is such that's incredible advice. Richard, this has been awesome and you have provided our listeners today with an enormous amount of value.
And I think this is a time when so many just don't know where to go right now. Is it a good time? Is it not a good time? And I think you brought that anxiety level down and you have a very calming influence, I think, on our listeners. So, I want to really thank you for your time and energy today. You're most welcome. Great to talk to you as always. Thank you. And for all of you out there, if you have a question for myself or for Richard, just click below and let's talk. Thanks for joining us today and I look forward to seeing you soon in the future and have a great day and a great weekend.
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