What Smart Growth Really Looks Like in 2025
John Gallucci returns to reflect with Paul Martin on what's changed, and what hasn't, in today's M&A environment.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon and welcome to another episode of Paul Martin's Crucial Conversations. I'm Paul Martin and today's episode is titled Clarity Amid the Chaos. What rehab owners need to know and we need to know now. And we got no one better here to answer some of these questions on how to make clarity among amid this chaos. I'm thrilled to be joined once again by John Gallucci. How's it going, John? Good, good. Pleasure to see you, Paul. Hello everybody out there. So John is a physical therapist. He's an athletic trainer.
He's an author about to publish his fourth book. And he is the CEO and president of JAG Physical Therapy. JAG Physical Therapy. Gosh, last time I checked, I think they had about a hundred clinics. JAG Physical Therapy has over 165 physical therapy clinics across New York, New Jersey, and Pennsylvania. So, congratulations on that growth. John, thank you, Paul. It's it's been a great experience and great ride. And I've got great team that surrounds me and that's what that's what makes it coming to work fun every day.
Yeah, you guys do a great job. So let's jump in. You know, I've been saying this for many months now, but you know, we are looking back. The election is over. Trump is back in office, and we're not going to make this a political discussion. Don't worry about that. But h how would you describe the M&A outlook for outpatient physical therapy now that we're almost halfway through 2025? Are we more optimistic or are we more cautious? And why? I think optimism is very high. I think as we all know, President Trump in his first four years tried to navigate that business transaction financing became easier for success in the United States of America, no matter if it was small business or big business.
I think the mentality of the administration this goound is very similar that he wants American businesses to succeed. His administration wants American businesses to businesses to succeed. I think like anything, the first six months of turmoil and changes in leadership in different roles and who's running what and what secretary is appointed and who's what, you know, that happens with every pre every presidential change. So I think that everybody's taking a deep breath. As you said, we're six months in. It's June already. I can't believe it's that quick.
And I think you're starting to see a deep breath. We're getting more and more calls. We're getting more and more opportunities. As you know, physical therapy is still it's amazing a fragmented market. And I think everybody is looking for opportunity. The interesting thing and when you look at your specific question, what you look at is the equity investors and the lenders interest. And I would say in the last four months, we've gotten more phone calls than we've gotten in the last five years. As you know, we came out of the end of President Trump's last goround coming through COVID and then we jumped into the Biden administration.
So, and there was a little bit of a pullback and a hold and wait and a wait and see. And you and I go to all the same meetings and you'd go and everybody was saying the same thing every six months. It was, "Oh, it's a wait and see. It's a wait and see." Right now, I'm very optimistic that there's great opportunity for physical therapy and the profession to grow. The other thing that I think is awesome, and as you know, I sit as a board member of the APQI and I've had the opportunity to go to Washington DC and speak to congressional leaders and senatorial leaders.
The vibe for the rehabilitation professions of physical therapy, occupational therapy, and speech therapy is we are an opportunity for people to get care, have access to care. And you're starting to see the politicians in DC realize that. So where we used to go in for a five minute meeting and sell, and do an elevator pitch, I sat with nine congressional leaders two months ago for no less than an hour. Each congressional leader. So, they're asking questions. They want to know about physical therapy and occupational therapy.
And it's the first time in my career of 35 years I've gone down to DC and felt welcomed to be there instead of, hey, meet with my staffer for five, six minutes. We met 45 minutes to an hour. We had congressional leaders in the room, senatorial people in the room. I think between the APA and the APQI, we are starting to make a difference and be acknowledged at the federal level. Yeah. And there is nobody else that I would rather have on that board speaking for us as physical therapists in the profession today than you at the front there.
So I appreciate those efforts. We all do. Thank you. Some recent recap efforts from some of the large companies have stalled. What does that tell us about current investors and their appetite for bigger deals or smaller deals? Talk to us a little bit about that. So, recap is interesting. You know, a lot of our colleagues out there, especially at the bigger institutions, grew very rapidly, added a lot, added a lot of debt, felt that a recap was opportunistic. But there are recap issues when people start to go into the business.
When you're operating 900, a,000 clinics or even 600 clinics and you've got close to 20 to 25% of those clinics not generating positive revenue flow and profitability. That that's more of a rationale of a recap stall or you've had a tremendous amount of change in leadership. Think about it. When you're recapping, you're refinancing. And just as if you refinance your car or you refinance your house, you want to make sure that the owner has an income, is generating a continuous income, and truly has a good history on their debt.
So, I think some of these recap stalls isn't so much industrybased. I think it's more that a lot of business leaders unlike you and I being health care professionals that are running PT. I think the recap stall has to be that people jumped into our industry thought it was going to be like every other business which is grow add debt add debt add debt and oh yeah let's just recap. But when you start to get into the diligence and you realize that close to 20 to 30% of your entity isn't generating appropriate revenue, I think that's where we're seeing the problem.
If you look at companies like me that has very little debt, if you look at other companies across the country that were smart in their growth, I mean, listen, Paul, nobody knows me better than you. You've watched my whole career. And ultimately, I am the tortoise, slow and steady. I never wanted to be the guy that owned the world. I used to look at our colleagues that wanted to take over the world. My biggest joke used to be I watch cartoons as a kid and the person that took over the world ended up blowing himself up at the end.
I have no desire. I'm slow and steady. We're strategic. We have organic growth. We have inorganic growth. And we're just trying to make sure we have a solid base and core. The other thing I think that's holding up some of these recap deals are how do you have a leadership team and then all of a sudden eight months later it's a different leadership team. You know, we've been fortunate if you look at my core team, my core team's around me for 10 years. And again, people say, "Oh, John, you should be in 10 states by now." And I'm like, "Why?
My revenue has grown. My profit has grown. My EBITDA has grown. My net income's grown. Everybody's making a living. We're happy. We like to call ourselves the crest toothpaste of New York, New Jersey, Pennsylvania. I got yelled at one time that I said Coca-Cola, so I say Crest toothpaste now. So yeah, I mean I think that people have to take a deep breath. I will tell you where we are seeing a shakeup in the industry is smaller companies, especially those that try to stay out of network.
They're hurting because when you sit there and you analyze them, you can't get a positive EBITDA. So you got to structure deals differently. Yeah. Yeah. So I what I hear you saying is that for some of these larger companies it's been you know they took big bites big debt and then performance post those big bites has not been what a new acquirer or a new owner would be looking for as they're looking at these companies and therefore they're not getting the deals that they want to get.
So, they're either now off the market or they're just kind of hanging and waiting. I I'm in agreement with you, but I'll also add realize we had a very successful company go public that didn't succeed in a public market. And I think that's put a little fear in people that were strategically going to try to get to a public market. So I think listen, it's a buyer beware component. You've been through diligence. Your company does diligence. It's not an easy process to go through. And if a red flag comes up, that's what's going to stall the deal.
Red flags stole deals. So, is JAG going to be the next successful publicly traded company? John Gallucci and the JAG physical therapy board have no desire to go public anytime that John Gallucci is alive. So I am very happy in what we're doing. We do have some opportunities going to our fourth state. But again, it's a fraud state that's aligned with our current core business. So, it doesn't make sense. You know, I always used to ask my colleagues, how are you jumping to 10, 11, 12, 13 states?
Don't you have compliance issues? And sure enough, in the due diligence, you're seeing compliance issues. So, you know what? I'm happy. You know, as they like to say, if you can make it there, you can make it anywhere. I made it to New York. I'm pretty happy being in New York, New Jersey, Pennsylvania, and Connecticut. I'm pretty happy. So, good stuff. Good stuff. You know, there's been some talk about corporate tax cuts potentially, then lower capital gains rates. How do you think those changes may impact companies like yours?
But more so, how does it affect sellers and their timing decisions on when to go to the market for a transition in rehab? Well, I'm sure you and people that you know at the level of business you're at are watching the so-called big beautiful bill, right? And what's really in it and what's going to be positive, what's going to be negative to whatever level of the industry you may be in. All of us know capital gains tax is very advantageous to the seller. And if the capital gains tax percentage increases, it's that or excuse me, decreases and benefits the seller, it's truly an advantageous component.
Do I think we're going to see a major shift in it? No. Do I think we'll see a minimal shift in it? Yes. Is it going to be truly significant? I don't think we see a significant because I gotta be honest with you, I think the capital gains tax right now has been very beneficial to people that have been in that merger and acquisition component. Now, when it comes to corporate taxes, listen, I think a health care company, and I'm just using healthcare as an example because that's where we live, you know, is getting killed tax-wise.
And when we get killed tax-wise, it doesn't give us the opportunity to hire the providers we need for the demographic that we're in. Think about it. If my tax basis changed by even 2%, if my tax base has changed by 2%. That's five more, six more caregivers that I can hire per year. Five or six more licenses I can hire. And if you look at some of our dense populations, you know, think about it. I'm in the five burrows of New York City. And what's weird for you and I, you know me for 30 years.
I'm the first company to ever touch all five burrows of New York City. And the density of those five burrows is enormous. I need caregivers every day in those five burrows. And if the tax implications were more savvy to help us hire caregivers and give a better provision of care to the community at large, I think it's important. I think it is important. And you know, I'm involved in the schools. I mean, we have over 128 relationships with schools at JAG physical therapy. And the unique thing is the schools are finally starting to realize the cohorts have to be increased because the populace of America needs physical therapists, needs occupational therapists.
So, I think that we're starting to see a positivity there with more graduates graduating probably in the next five years. So, I know that we talked last time when we spoke a few months ago about the 25,000 physical therapist shortage in America that might hit us in five years. I'm hedging my bet and saying maybe there'll be a 13 to 14,000 shortage because I think that the educators have finally realized that the America needs increased physical therapists. And kind of from the top down is I think where you're describing which is you know again if we're able to have more in order to pay more physical therapists coming out of school I think some people who want to become physical therapists look at the salaries and say I don't know I could go into business and I got a lot of friends there.
So we got to have therapists. They got to be paid well. They got to be willing to work. And I do think again with those capital gains rates, every little tick is, you know, multiple more therapists that we can have. And it ends up impacting the patient because the patients then don't wait and it's that that that's the good cycle. I also think our profession has lost its efficiencies of education and I've spoken on this numerous times. You and I came from a generation that you can graduate with a, you know, a bachelor's degree and a certificate in physical therapy that you took over 9 to 12 months.
And some of those people were some of the best hands-on biomechanical physical therapists that I've met in my career. Our education has now gone to a postbachelor with a three with a three-year doctorate degree. I agree with the doctorate degree. I don't agree with the three years. I think we need to get more efficient with our education. We have been providing physical therapy. You and I have been in this marketplace for 30 years or more. You have me by a couple of years. I'll point that out to the audience.
But ultimately I think we have to get more efficient with our education. I also think that the change of the provision of physical therapy has changed drastically in the last 15 years. That outpatient physical therapy has become the largest giver of physical therapy for people in the United States and I don't think CAPI has caught up enough with that and I think they need to understand where the market has changed and if you look right now the biggest provision of physical therapy is in the outpatient world and they have to start to understand that education has to change towards that model and it's I've got no negative towards my inpatient I have No negative towards my subacute, but the provision of physical therapy and occupational therapy, the majority of the service is being given in an outpatient world and our education and our testing and our preparedness has to be geared towards that.
Yeah. No, great points. Really great points. Let's switch now to multiples. You can't have a discussion with John Gallucci without talking about, you know, the Mword multiples. Are you feeling for the small to medium-sized businesses that multiples are holding up? Have expectations kind of cooled? And are there some creative deal structures that you guys are using to bridge that gap? That's an awesome question, Paul. And I've been I've been you as you finally asked the question the appropriate way. I've been asked the question four different ways, and you hit the nail on the dot.
So, here's the funny thing. In 2019, before COVID, multiples were at an all-time high. 2020, of course, we saw the market stall because of the COVID. 2021, we saw a little bit of a heartbeat. 2022, the heart finally had some life. The interesting thing, if you were to compare multiples, and we'll do this strategically, you and I. If you compare multiples between one to five clinics and then I like to say 10 or above clinics and you compare to 2025 rates right now of multiple it is comparable to 2019.
So have we really lost much? No. We are comparable to where we were before the I like to say the co years. And for us to rebound, America to rebound or the rehab world to rebound so well that we're comparable to 2019, we should be proud. But again, I think it's people like you and me, the advoc advocacy down in DC, the importance of the profession, the realization of the profession. I think that's what we have to look at, which is why we've been able to hold those multiples.
Exactly what you just said, right before co We closed one of the best deals that we've ever done. Yeah. And we were I mean things were just buzzing. So I agree with you. I think we're back to that 2019 level which at that point in time we were all you know you know. Absolutely. The other thing I want to make sure that your listeners here and again this is not a plug for Martin healthcare in any way shape or form but before you go to market you need to speak to a Martin healthcare to understand what is due diligence really mean and people have no concept of what really EBITDA ibida adbacks are.
Everybody sees how they're living, but they don't realize when you put it to an accountant, it it's got to come out in a positivity to give you a positive. And the easiest way to answer that is zero multiplied by anything is still zero. And and I think there's a way of education. And again, I'm more than happy to do anything with Martin Healthcare to kind of teach people there has to be an education before you go to market. Really understand what is IBAL look like? I could tell you we've got deals coming in left and right, but they're all negative Ebidots.
Yeah. Yeah. Yeah. You know, we like clinics just not operated appropriately. Exactly. Yeah. No, we like to call that widening your lens on what acquirers are going to be looking for as well as, you know, who really is out there. And no, you're exactly right. And in the large majority of the cases that EBITDA, that cash flow, it's in there somewhere. It's just not getting pushed to the bottom. Exactly. Exactly. It's there. And again, the easiest way, and you and I both know this, if somebody's got 5,000 visits a year, that there's a way to get positive.
It's just a matter of understanding your balance sheet and getting it into the right spots. Absolutely. Absolutely. So, we touched on this a little bit before, but I I'd love to hear your opinion. What do you think will have for privately held companies? What's going to have the greatest impact on this physical therapist shortage? Just about every client, every company we talk to out there, they need two therapists, they need four, they need one, they need what's g what can we do to have the greatest impact on that shortage over the upcoming next one to three years.
That's a great question. I think the biggest thing is and again the academic institutions started to talk to people like you and I that are in the industry and learned that the cohorts were too small. So, just here in the tri-state area, I know of eight schools that have increased their cohorts by 25 to 35% increase students. I also know of two schools that have two cohorts a year going in, which basically doubles their graduates on that. So, I think that's important that the academics have realized what the marketplace is showing.
The second thing that's important is for the first time in 10 years, first time in 10 years, we're going to be hopefully in 2026 flat, if not have an incremental raise at Medicare. For us not to be cut only leads to the opportunity of increased revenue, increased PPV rates, which gives us the opportunity to have a solid profession of growth. I think that's very important. Realize when you're coming out of school and you hear that there's been cuts over the last 10 years and you have an 80 to $100,000 loan looking at you in the face.
I think that's a scary thing. The other thing I think we need to talk about too is let's call this straight a spade. We touched on it earlier. We need to get efficient with our academics. Our students should not be graduating with $100,000 loans. And unfortunately the original thought was, oh well your company will pay you back. The company's paying you to work, the pay company's paying you to produce, you're within normal standards, you're getting the opportunity. Really what has to happen is we really look need to look at efficiencies and opportunities.
So JAG itself has started some scholarships in different schools and opportunities in schools and I think more of our colleagues are doing it but the institutions need to be efficient. Does it really need to be three to three and a half years? Could it be two and a half years to get your doctorate? It is a clinical doctor. It is not a PhD doctorate. So I honestly feel there's opportunity for efficiencies in the academic world to decrease those loan payments. I think if we do those things, keep advocating for ourselves, keep working with the academics, working with CAPT, I think we've got a huge opportunity.
Like I said, we were talking 25,000. Now I'm talking 15,000. And that's just in the six months based on what I'm saying. I think we have an opportunity to shave it. Also, most people have to understand when I speak, everybody thinks I'm just speaking about the Northeast. That 25,000 shortage or 15,000 shortage is all 50 states of America. When you go into some rural areas, there's gaps of quality care. There's gaps of provision of care. We really have to take a look at that. Everybody in America should have the opportunity to get care.
Absolutely. And you know, John, we've talked in the past a lot about your relationships with payers, and I feel like for privately held companies, in many cases, that's taboo. I don't want to be a partner with a payer. They're they're the bad guys. You've taken this approach of no, you've got to get out and really get in their heads with what you're providing and what you're doing and having the ability to then that's the only way you have the ability to make create change. I see you now with, you know, the drastic shortage of physical therapists and physical therapy assistants.
I see you partnering with schools. It's been huge. And you own a company with 65 clinics. Are schools then going to push back a single clinic business owner that wants to go and help and maybe give a class or do a talk or is it just the big guys or can small privately held physical therapy business owners go out and make an impact with schools? Absolutely. As long as you're willing to teach at the clinical level, any level of company can do it. It's just a matter of do you want to teach the next caregiver?
I've always taught the next caregiver. I'm proud to say if you look at professional teams across the United States, you look at professional teams in Europe, I've trained some of the best physios and athletic trainers and I'm proud of that. I mean, when I walk into Giants, well, I'm sorry, Metife Stadium when the Giants name is on it. When I look walk into Met Life Stadium and the Giants are playing and I see a young man Justin Maher that I had the privilege to educate in my clinic and now he's on the sidelines taking the best of the best to the NFL.
To me, it's very proud. I mean, I've got friends in Europe that are working. I've got colleagues through the United States. One of my students now is working with FIFA handinhand, employed by FIFA, setting up for the World Cup next year. To me, you know, I'm like a proud dad, you know, so it really it really depends on how much of your time you want to give. You know, my chief of staff, Stephanie Czecho, you know, her for years. She's been with me for years. You know, sometimes she gets frustrated because I'll throw somebody in for 30 minutes here, 30 minutes there.
She calls it JAG guidance counseling. I love JAG guidance counseling. I have a philosophy. One good brings two back. So, why don't you want to give a hand to get somebody to rise to the occasion? I mean, I wrote the book, The Jack Method, just to get people to realize we've all been there. Everybody's had a bad day. Let's turn a bad day into a good day. And we've got plenty of people to help you. Yeah. So, so I think what I'm hearing is get out, make an impact at the schools.
And John, you know, unfortunately, you don't have the best of the best at Metife. You got to come down here to Lincoln Financial. Okay. That's only because you had to steal Saquan. Come on. You had to steal. You would have never won the Super Bowl without a New York Giant. That I that I 100% agree with. And we could have another session for our audience. We could talk football. But for today you guys I will tell you have been given such phenomenal information today. And so, John, I really appreciate it.
You get better every time. Well, I'd like to leave the audience with one thing. Remember, have fun every day. There you go. There you go. Have fun every day and start today. And for any of you that have questions about what we have talked about today, for John or myself, click below and let's talk. Have a great rest of your day and a great weekend.
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