Good Deals Are Still Out There, But The Game Has Changed
Chris Reading of USPh joins Paul to talk about what's driving today's M&A market, why some buyers are slowing down, and what sellers need to get right.
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 today's episode is titled Clarity Among the Chaos: What Rehab Owners Ne. And I am thrilled today to be joined by a longtime friend, Chris Reading, from USPT. Chris, welcome. What's up, Paul? Chris is a physical therapist and he is currently the chairman, CEO and director at USPT. And I will tell you Chris is one of the most impactful leaders in the physical therapy industry. Someone who has paid I always tell folks this you've played such a key role in shaping the future of private practice but mainly building those bridges between independent physical therapy private practices and large corporate PT companies and so Chris thank you for all those efforts well it's very nice very kind of you as always USPT publicly traded physical therapy company headquarters in Houston, Texas.
And USBT currently operates over 775 outpatient physical therapy clinics, 43 states. They also provide industrial injury prevention services. So Chris, what do you think? Let's dive in. Let's go. All right. So, Trump is back in office. Has been so for many months now. It feels like it's been years with what he's been doing. But how would you describe the M&A merger and acquisition outlook in rehab now in 2025? We're more than halfway through. Are we feeling more optimistic or are we feeling more cautious? And and why do you think either of those are the case right now?
Yeah, I really have, you know, it's been interesting. We've all been waiting to see whether this budget would get done. I think it's important for the country, good, bad, or indifferent, that it's done. I expect that they'll come together still in the fall and do another patch because I don't think they got everything exactly the way they wanted it given the time frame constraints. But look, I' I've been optimistic all the way through. I haven't been pessimistic at all. Administrations come and go, policies come and go, things change, and yet, you know, we're still in this business of caring for people.
We we have a job to do. There are challenges and opportunities. And I think trying to predict when it's the perfect time doesn't isn't necessarily a worthwhile exercise. It's trying to predict the stock market. I don't know about you, but it hasn't worked out great for me. So it's better to do what you need to do when you need to do it and you know average out over time, I think. Yeah. So, and what I'm hearing from you is that right now you know we're not seeing what we saw back in 2008 and what we saw in you know for a large part in 2023.
You know you're staying optimistic and positive and you know I think we feel the same way. You know, some of the these have all been public. I won't name the companies though, but you know, some of the recap efforts out there have stalled. What do you think that is telling us about the appetite of current investors for bigger deals and what do you think the appetite now is for some smaller deals? Yeah. So if you kind of rewind a little bit to understand why some of these big private equity backed companies are whether it's recap efforts or public go public efforts or just operational challenges you really have to go back to you know the period after COVID 2021 where everybody's everybody came out of COVID really in pretty good shape I think for the most part the big companies did a lot of the small companies did as well.
Money was still free in 2021, meaning interest rates were incredibly low, very little friction to get things done. And there were a bunch of deals done in 2021 that were probably slated sometime, you know, in that COVID period got pushed back a little bit into 21. So a lot of these big companies transacted then at really high multiples and really high leverage rates or leverage ratios. And then middle of 2022 happened which combined some scarcity of employees particularly licensed staff in combination with a rapidly accelerating interest rate environment and inflation.
And these companies which were hyper levered to begin with and had adjustable rate debt found their debt covenants broken and their interest rates now mid double digits many of them and that's kind of an impossible place to be. So these are all good companies. I think it has it has less to do with whether the environment's right now or it isn't. It has more to do with what happens when people overextend and then have balance sheet trouble. So, I do think it impacts the largest of opportunities right now because there isn't the feeding frenzy that existed in 2021.
Some people can't get things done. Some people are less willing and have to get the returns right. And so I think for the smaller deals, it's always been fine. It's fine right now. We're getting a lot done in both injury prevention and PT. I think for the biggest deals, it comes down to who do you want your partner to be? What does their leverage look like? What does that how does that impact your business and likely impact of your business going forward? And and then what's your long-term view?
Are you selling to be done? Are you selling to be around for a while? So, I think all those things come into play. Yeah. And you know, h having watched you and USPT over many years, I've always described you to clients as this is the steamship just that just continues to go and move through the ocean. It's not like a little speedboat, you know, it's zipping around. And you guys have always been you know not willing to you know kind of go with some of the turns and you guys have just stayed very focused on your mission.
And I've always admired that about you guys as well as yourself at the helm. I appreciate that. I mean look we've gotten bigger things done. You know, last year was a good example, the biggest deal we've ever done in New York. Yeah. Ironically in New York. But with a great partner and so for the right things, you know, we're willing to be in the mix. Absolutely. This the steamship thing just means I guess it's a compliment that we're slow and steady. But you know we have kept a pretty clean balance sheet for better for worse and it's helped us through some tougher times particularly co it's great right now we have the capacity to do a lot if we find the right things to do.
Sure. No it was absolutely a compliment for sure. So you know, I'm going to use the T word. You know, we have some new tariffs in place, right? And there are still concerns. I know you talked about rising debt costs, etc., but there are still concerns of inflation as well as higher debt costs. How are you seeing some of those pressures impacting deal volumes and structures right now? You know, I think look, I think they impact everybody. They don't just impact sellers, they impact buyers as well.
I think inflation right now is here to stay for a while. I mean, our country's monetary policy, whether you like the big beautiful budget or you don't, you know, we're still racking up massive deficits. Dollars weaker. Interest rates are up. I don't see them coming down anytime soon. Labor markets still pretty tight, still pretty strong. And so again, I think people have a tendency to look in the rearview mirror, whether it's on life or other things. And you know, if you go back to the what would be called the good old days, 2018 to 21, when money was free, things were easier.
We hadn't yet, you know, been racked with five straight years worth of Medicare cuts, labor was more available, with less inflationary pressure. And so I think people feel like they're on the wheel a little bit, meaning they're grinding. They're grinding. They're growing, but they're not a lot more profitable potentially. And and I think, you know, for the capable folks who still feel like they can get there, that puts them maybe on the sidelines a little bit more. But look, I think it depends on, you know, first movers, there's an opportunity in these markets to do certain things.
Sometimes help makes that better and faster and easier. Depending on who the partner is. So I think it's an individual consideration for each of these sellers and where they are and where they feel like they want to go as much as the value, you know, today. Sure. Sure. Chris, you mentioned Medicare and you know, I know very recently APA came out about the private practice legislation that's going to allow physical therapists to opt out of Medicare and you know, really interested to hear your take on that and how you see that impacting independent physical therapy practices as well as larger companies.
Yeah, I'm not, you know, you mentioned that at the beginning when you and I were chatting. I'm not particularly intimately familiar with exactly what that proposed legislation says. Yeah. Even though we we've been in pretty close contact recently and ongoing with the APA, I you know, I need to I need to do my homework a little bit. But from my perspective, this has been a question that's been on the horizon given these sequential Medicare cuts and we've talked about it as well. There is an inflection point and we reached it with Medicare Advantage a couple of years ago where we began to drop significant chunks of business on the MA side and immediately replace that business with better paying business.
Didn't miss a beat. And some of these Medicare Advantage contracts in my view have been predatory with respect to providers. And so I don't think there needs to be a legislative effort. I think there needs to be a rational response when you're asked to provide care at below your cost. Yeah. And and I don't think providers should. I know they have. We have. I think we're done doing that. And it's competitive enough and there's enough demand that we feel like we can offload whatever parts of our business we want to someone else and replace it with better business.
Yeah. Frankly, and so I think that's on a lot of people's minds. I don't think a lot of people have done it yet, but any more cuts going forward and people are going to have to make that assessment. Absolutely. And Chris, I can tell you if you go back on videos that you and I have done over the many years, this is not the first time you have brought up that you just can't accept contracts that are, you know, at or below your cost. Long-term impact of those are just not good.
And so hope hopefully more have heated and are u making those decisions to just say no. Look the challenge is and we get we hear this a lot and other small providers hear it as well. You know in Florida and other places where the market's particularly tight and a provider will come out and say look we don't have to have you. We'd like to have you, but we have plenty of people willing to take 40,50 $60 a visit business, so why would we do anything else?
And there's a certain honesty in that, but it's unfortunate that we as a group, you know, can't figure out that you you're quickly going to go out of business if you don't have margin in every visit. And you know, you're not making it up in volume for sure. And the regulatory requirements are too tight to flirt with playing loose. And so it's a path to nowhere. Yeah, for sure. For sure. So, so generally, how active do you think acquirers, buyers are right now? And what type of companies are most attractive in this current market?
And for you guys, has your kind of ideal acquisition profile, has it changed or is it very much the same as it has been over the many years? Yeah, I really can't speak for everybody else be- because I'm in a fortunate position to have good relationships with most of the other CEOs. I kind of know where they are and some a number aren't doing deals right now because they really can't. Some still are. Fewer are than certainly were a few years ago. Again, for the reasons we've discussed, really hasn't changed our view.
If anything, we're open to doing bigger deals. We've looked at a number of the number we've looked at. Some still haven't transacted yet and I think won't given expectations internally on the side of the seller. Others have gotten done. We've gotten a large one done. So we've been open for business. We're still looking for good people that care about what they do and that want to grow and make a difference and want to partner that gives them the freedom to also be involved in the decision process and where they own, you know, a significant interest in what they work on every day, not necessarily in the parent company, but in the local company.
So, for us, it's a good as good a time as ever. There's less competition frankly. And you know, to your to your point a couple of times. You know, multiples probably have come down a little bit, particularly at the highest end, doesn't mean it's a bad time because I don't know that as long as interest rates don't go back to zero, which I don't expect that they will in my career lifetime anyway, you have to do what's in the right long-term interest of your family and your company depending upon on what your goals and objectives are.
And so I still think even though, you know, even though I missed the dot era, you know, back in the 90s when Yahoo and all these other companies were around and people were making 70 and 80% gains, that doesn't mean that, you know, I shouldn't have still been in the market and tried to otherwise execute on the plan. And it works out over time. And so I think for most people, you just have to assess your goals and determine, you know, when it's good for you and who's good for you.
Yeah. I think the word I was missing when I when I described that steamship is patience, right? Patience. If this deal really is just not going to work, that there's going to be another one behind that and another one behind that. And yeah, I've always admire you and your and your group and the patience that you guys have in going about transactions. I appreciate that. Look, for us it's about getting married for a long time and I'm late in my career, I guess you could say.
And I don't want to make anybody's life worse, and I don't want to make my life worse. And so for us, if it's not a fit, you know, we don't we don't want to do it. Because we're not subject to I mean we're in the market we're you know we trade on the stock exchange there's everybody's got pressure to grow we do as well but we don't have pressure to do the wrong things at the wrong time and we won't do that even if we do feel the pressure to grow because we know that there are the right fits out there and we will be patient.
Absolutely. Absolutely. So, as we look at our group today that's, following us here, some of them may be considering doing something in this year or next year or they're ready to do something right now. What do you think sellers should be doing right now to position themselves for a successful deal? And are there some common mistakes or blind spots that you've seen and you're currently seeing that sellers have? Yeah, I don't know that they're any different now than they've always been. I mean, I think, you know, just trying to run your company as effectively as you can, having a growth plan.
I mean, you know, we see companies sometimes they have advisors, sometimes they don't. They won't have opened a clinic or done a tuck in or you know an aquovo you know for four or five years and yet suddenly they have a growth plan to do six or eight more clinics it's not it's not credible and so even if it's aspirational it's not credible I think so if you begin to stack up things that aren't that aren't likely to happen or aren't credible, that kind of hurts the process.
I think being who you are, you know, being forward about strengths and weaknesses because we all have them, you know, that's just part of life. We're not all good at the same things. I'm not good at the same things, you know, relative to the people that I have around me. And so just being upfront and honest about that makes everything go smoother. And then always the only time we see material disconnects and I'm not sure this is entirely avoidable but is around the compliance side. The reason I say may not be completely avoidable is a lot of times people think they have it right, but they just don't have the resources to really know.
And so there's a disconnect in the value if the coding's wrong or the scheduling's wrong or there's some element of compliance which meaningfully affects profitability and that tends to hang deals up. Not because somebody got it wrong. That's not a big deal. But because there's a value disconnect between where the seller thought they were and where they actually are. Sure. Sure. And that'll put things on pause. So, I think as we work with clients and talk to potential new clients, you know, this nationwide shortage of physical therapists and physical therapy assistants, how do you think it's affecting the market and what advice would you give to private practice business owners out there on how they can in some way you know, make the most out of those that they th those physical therapists that they are able to hire and how to reach out and find new staff in a market that is just so difficult to hire professional staff.
It's really difficult. You know, we've had to do a number of things both on the recruiting side. One of the best investments though, Paul, we've made in the last years, we brought somebody on with kind of an educational PT, a strong communicator, a an educational background, and created a very purposeful connection with content that we're able to deliver to the physical therapy schools while these kids are in school. And the content isn't mostly isn't physical therapy related content. It's life related content. Interesting. You know, are things that young people need when they come out that are skills that take a while to develop around budgeting and financial management and, you know, balance and how to create all that.
So I think one of the things that small practices have to do is they have to connect with the schools. They have to take students. They have to have a social and coming from me, what I'm going to say is kind of ironic because I'm not a big social media guy. They have to have a social media presence that speaks to their culture and that shows that, you know, they're doing things that are meaningful and that are fun and that people can want to see themselves being a part of.
And it's different than, you know, the old days where you had a lot of applicants and you hired the best one and, you know, they figured it out and you've got to have mentorship now. You've got to check in. So, the biggest opportunity really for all of us, and I'm not saying that any of us have it figured out, is how to keep young people in their first or first or second job for years instead of months or year. I mean, the average new grad stays in their first job 10 months.
Wow. I mean, that's ridiculous. Yeah. And yet, that's our profession right now. That's the state of our profession. I mean, imagine you can't you can't find a doctor who would tell you, well, my first job I stayed less than a year and then I went to my next job maybe I stayed a year and a quarter and then by my third job I stayed three years. Yeah. Doesn't happen anywhere else. And yet that's the world we live in. And so we have to figure out how to keep young people engaged in seeing the path and the progression that's available before they're off to the next better thing.
Yeah. And you know I know there's a lot of criticism of young people and you know their desire for work life balance and some of the other things. But I find and I've spent a lot of time back at my old alma mater at Gettysburg talking to physical I'm sorry to students who want to become physical therapists, maybe want to own their own physical therapy practice someday. And what I find that they want is they want education and they don't want it to stop when physical therapy school stops.
They want to continue to grow. So while you have, you know, folks that can be a little frustrating at times, I think you also have this desire to grow in the profession, become better at their craft. And I think if you can play into that, and I don't know if you guys see the same, but if they can play into that is where you can keep some of these young people engaged for a long period of time. Yeah, I think that's certainly part of it. You know, I think the other another part that we don't hear a lot about is just it's a combination of two things.
Connection and purpose. You know without those two things and what I mean by connection is a deep connection with your team and a deep connection and a purposeful connection with your patients. I mean some of the dearest friends I have in my life throughout my life started as patients and they came back over time for different problems and I got to know their kids who ended up you know having kids and I think schools don't teach it. I'm not sure society teaches it anymore because, you know, if you look at the statistics, we're as lonely a people in our country as we've ever been, yet there are all these opportunities supposedly for connections through social media and other things.
I think when you get right down to it, the phone has become too important and the eye contact and the deep connection, you know, we've lost a little bit. That in combination with truly understanding that you're making a difference in somebody's life, you're changing their path and all the many very positive ripple effects that has rather than treating it kind of like an assembly line where patients are really tissue problems or physiologies that we're having to tweak and turn. They're people and they have, you know, fears and aspirations and things.
And I think helping people plug into the real reason most of us got into this profession and keep that front and center is a big part of what's going to change things too. And and it's not easy to do. And and I you know you find sometimes that they don't think they want that you know they don't think they want that personal connection and you know they want the phone they want the but once they're shown how to make as you just said make those connections they're happier they're happier therapists.
It's what it's what honestly it's what we all want in our life strong relationships. You want to be perceived as being valued. You want to have God makes us, I think, for me at least, to have purpose. And if you can blend those things together, it's a much better place. Absolutely. Absolutely. Well Chris once again you have given our audience just an enormous amount of value as well as just great information and always just such such great conversations with you. Sometimes I find that we're able to go a little deeper which I think is engaging for our audience.
It's certainly engaging for me. So I want to thank you for taking the time and sharing today and we look to have you back on the show soon. Thanks Paul. You're fine gentlemen. You're a great friend and I really appreciate it. Thank you. You as well. You as well. So for all of you out there, if you have any questions for myself or Chris, just click below and let's talk. Have a great rest of your day and a great weekend. Thank you.
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