A Second Look at Proactive Moves That Drive Real Returns
Tom Carden and Joe Anzur join Paul to discuss the 2025 outpatient rehab M&A market, including stalled recaps, earnouts and rollover equity, compliance, multiples, and staffing.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good morning and welcome to another episode of Paul Martin's Crucial Conversations. I'm Paul Martin and I welcome all of you. Today's episode is titled Clarity Amid the Chaos and we're going to talk about what rehab owners need to know now. And today we are going to get insights from Tom Carden and Joe Anzur on this current landscape and how it's shaping out for sellers and their strategy for 2025. Welcome Joe and welcome Tom. Thanks Paul. Hey, good morning. So Tom is the senior managing director of mergers and acquisitions here at Martin Healthcare Advisors and Joe is the director of mergers acquisitions at Martin Healthcare Advisors as well.
So if you guys are ready, let's jump in. Sounds good. Sure thing. All right. We are not going to get political at all in this discussion. But first question is, you know, now that the election is behind us, Trump is back in office. What are you guys advising outpatient rehabilitation owners who are considering doing some type of transaction in 2025? Do you see this as a time to press forward or a time to wait? And why do you see either one of those strategies? Well, I'll start Paul.
I think the little bit of backdrop is, you know, the new administration. So, you have changes, right? And and then, you know, he has some of the things that President Trump, you know, said during the election process that he was going to do. So, going to be some bigger changes. You know you have tariffs, you have liberation day you know which created so much uncertainty in the markets and the markets don't like uncertainty right they want to be able to say hey no we really feel good about this deal you know we really feel good about this investment and so you know right now you know he paused the president paused some of the Chinese tariffs and some other things and you know the market really started to accept that, right?
But it's only a 90-day pause. So, it's still uncertain like where are we going to be, you know, in 60 days, 90 days. So, you know, we're talking to our clients about timing on when to time the market. You know, no one wants to time the market, but you know, we think that there's going to be a lot of activity in the second half because a lot of this uncertainty should be out of the market and, you know, if inflation holds and unemployment holds, you know, it could really be a great setup for a really big second half.
So, you know, that that's really what we're talking to our clients about and just saying, look, you just be ready. You know, you have to be ready because it's [clears throat] not like the doors are going to open up. The doors are open. The question is this the right time to walk through? As as you're looking at what's going on in the market today, we've become aware of a couple recap efforts that have stalled. How do you think those kinds of situations influence seller expectations as well as acquirer behavior in the current market?
Joe, do you want to take that one? Sure. Yeah. So, so with some of those different hesitations, I think from our clients, there still is that market for smaller transactions to be done. I think echoing what Tom said in response to your first question, a lot of these market uncertainties that have been occurring over the past 90 to 120 days, as we see those start to ease, we should hopefully see, you know, some greater momentum heading into the second half of this year. I think part of, you know, some of those delays or hesitancies with some of these larger recaps are driven by these uncertainties and just the overall willingness of some very large acquirers to preserve some capital through this uncertainty.
Maybe see what effects are going to take place from either an inflation perspective, an interest rate perspective, and let those concerns, you know, and ease before really undertaking some of those much larger types of transactions. That being said, it probably now is the time for some of these smaller deals and smaller transactions. We still see a market there, but like Tom had mentioned, we do want to advise our clients to, you know, possibly wait a bit longer, but prepare themselves to the point where, hey, we want to get into the market at a position of strength.
We want to make sure we're completely buttoned up before actually taking an approach to going to market, but we do want to make sure that timing is right. Yeah. Yeah. And just to be clear Joe with these big companies that have stalled these are companies with 25 plus million dollars of EBITDA, right? These are these are really large companies. Is that is that accurate? Yeah, absolutely. I mean it's a it's a completely different playing field overall compared to you know say your private practices upwards of you know 7 to 20 clinics.
Got it. Got it. And we, you know, I know we talked a little bit about cost of debt as well as inflation, and, you know, having some of those concerns. Is there a way that, some of these acquireers are becoming more creative, in terms of how they're structuring transactions to account for some of those some of that uncertainty? Yeah, they are. I mean, you think about it, you have, even though you have some of the bigger companies that, you know, didn't recap or that have debt issues, you know, the market is very vibrant.
I mean, US Physical Therapy is just cranking on acquisitions. You know, they raised some additional equity, they raised some debt, you know, they're very acquisitive. And so their model hasn't changed, right? But but some of the others, you know, there there's still a gap, okay, in valuation because, you know, some of these sellers say, "Oh, geez, you know, I was talking to this company in 21, 22, you know, and they were going to give me axe." Well, you know, interest rates would up 500 basis points.
You know, you've got two wars, all this other kind of stuff happening, you know, around us and there's a gap, right? So, what we're seeing, you know, for the first time in a long time, we're seeing some earnouts and so, you know, maybe they get, you know, they're looking for a seven multiple or an eight multiple and buyers willing to go, you know, six and a half, seven, and then they'll do some kind of earnout, you know, based on, you know, EBITDA, revenue, visits, whatever it may be.
So we're seeing more of that. And then the other thing we're seeing in these transactions where the seller gets to roll equity into either a local entity with the new partnership like US physical therapy or at the holding company, you know, and so what we're seeing is that the buyers are trying to preserve the capital they have. So they might be saying, "Hey, you know, we want you instead of rolling 20%, we want you to roll 30%, 35%." And so as long as it's the right structure and as long as it's the right company, you know, we see that role of equity as being really advantageous to the seller.
So, you know, we're seeing a little bit more of all that. You know, when rates go up like they went up, you know, valuations got to come down a little bit because it cost them more to make to do a deal. And so, we're it's still really good activity if you think about it. You know, like Doctors of PT and Cyprus and JAG and Therapy Partner Solutions, US Physical Therapy, PT Solutions, like we we've done deals with all those companies and Sure. And and so when the top is not the top acquire or I say the top companies in size have paused, right?
There's there's no gap. I mean, these other companies just fill that void. And yeah, it tends sometimes to be more exciting for a seller to be with those faster growing entrepreneurial companies. Sure. Sure. Yeah, I agree with that all. I mean, these aren't structures that we haven't seen in the past either. You know, the earnouts have always been there previously. It just has not been as prevalent. On the rollover equity side, like we mentioned earlier, from a capital preservation perspective, that's really what leads to, okay, instead of rolling 25%, let's roll 40%.
You know, trying to get creative in the sense of creating that win-win scenario for both the buyer and the seller and really, you know, complete that transaction. Are you seeing any concern based on regulatory risk? You know, I guess we're still waiting to see how the new administration will change the pace of, you know, or the aggressiveness of healthcare consolidation. What are your clients thinking about regulatory risk right now? I don't think it's a really a main factor that's coming up in conversations just yet. You know, there have been some discussions or threats or whatever it may be about possible cuts to Medicaid, Medicare, alterations there, but until there's really some type of definitive bill or executive order, anything of that nature, it really has not been top of mind quite yet.
Things like that typically start with some of the largest companies in terms of impacting them and then work their way down in size. So if there are things it may you know it may not be an immediate term impact either. Yeah. You know always rumors that lower capital gains may be coming. How do you guys manage, you know, the whole you know, the talk all over the internet and social media of capital gains taxes be being lowered and in conjunction with talking to your clients about timing for, you know, when they would take their business into the market.
Well, you think about the president's bill that just passed the House, right? And it it's very advantageous to businesses and to consumers, right? And so, you know, if you can sell your business and only pay 20% capital gains as opposed to 40, you know, you do the deal, right? And so, we don't we don't give any tax advice, but we say, you know, just what I said, which is with taxes where they are, tax rates where they are, it makes sense that, you know, if you sell your business for 100 million bucks, you know, you can save $12 million on it, right?
So, I think I think it's advantageous. Yeah. Yeah. And are you seeing deals in this current climate moving faster or you know what do you think are some of the biggest timing risks or potential opportunities for sellers right now? I don't think there's been that great of a change in overall timing per se. If it's a quality asset and you've done your work in preparation going to market, there's no skeletons in the closet, it should be a clean diligence process. It maybe it might take an extra week or so to get a signed letter of intent and negotiate some terms.
But in the grand scheme of things, we haven't really seen the timelines change greatly in one way or the other for quality assets. Yeah, if there's a snag in diligence, of course, well, no matter what the markets look like, that's going to lead to delays. So, I think just in today's environment, you know, if there are companies that go to market and you have all your eyes dotted and your tees crossed, I don't think there's any real changes in timing compared to last year, two years ago.
Great leadin to my next question which is you know with buyer activity right now what are the types of sellers and their dynamics that are rising to the top of the sellers lists I'm sorry of the buyer lists well you know it's you have to be prepared you know what you're prepared in this and how are you approaching a transaction and it's just not financial you or compliance or operations. It's just it's mentally where are you right? And so the clients are you know ready to go.
They're a little hesitant because of what's happening in the market, right? And so that's cool. You should be right. But it's really the biggest the biggest change or issue that we've seen is compliance. And you know what is your compliance program? And you know, most of the smaller companies, you know, think they have a really great compliance program and they think they have a really great compliance manual. And then, you know, you get, you know, these bigger organizations that, you know, can't risk their whole business because they bought your business and you've got a Medicare problem.
So, you know, we're really advising, you know, hire a compliance consultant, have them come in, have them, you know, observe, you know, your therapist, look at the notes, you know, look at this how you're scheduling patients and make sure you are compliant because everyone thinks they are, but I don't know, Joe, there's kind of I don't think there's been a deal where we haven't had somebody have to tweak something. So, that that's kind of the big the big hurdle, Paul. You know, the you know, we manage the due diligence, so you know, we we're not we're not that concerned about it.
We've done a decent amount before we take the deal into the market and compliance issues will cause major delays. Correct. Oh, yeah. I mean it can make people walk away because you know if you're if you're not scheduling the patients right I mean that goes back years and years and years and so some of the time it's just you know the little overlap or something like that but compliance can kill it. Yeah. Yeah. Absolutely. Absolutely. So we cannot do an interview with two of the smartest people in investment banking outpatient physical therapy without asking you about multiples.
Right? Big question. So are multiples holding? Are they softening? Are they splitting into some unique tiers from where they used to be? And how are you guys helping to bridge that gap between seller expectations as you mentioned earlier and compared to what buyers are willing to pay in this current market? I think they're holding firm for the most part compared to say the last 12 to 18 months. They're not where they were in late 21, early 22 when they were at all-time highs. May not get back to there, but we haven't seen them take any kind of substantial dips or anything.
I think we probably saw them bottom out in maybe early 23 and subsequently rebound. So, feel like they've been fairly stable, at least in the clients that we've taken to market. Really, what we present to them throughout the preparation process, it's been fairly in line with what we end up getting in almost all of these different processes. In terms of managing expectations and bridging gaps, it's kind of going back to the creative structures that were mentioned earlier in the call where there may be an instance where they say, hey, Tom said, we have clients may bring up, hey, in 2021, this person wanted to offer me X.
Now, in 2025, they want to offer me Y. This is the difference. Okay. Well, let's see where financials were then, where they are now. Your operations, how have those changed your staffing, what does that look like today? All all aspects of the business to say, you know, we there may be an opportunity to have, you know, a potential bridging of that gap in the form of an earnout or getting creative in some of those other structures we had mentioned earlier. Sure. Sure. You know, you guys, you're working with sellers every day and we talked about compliance and the, you know, issues that compliance can bring up in a deal process.
Are there any other blind spots that you're seeing right now that could significantly hurt a company's valuation or significantly slow down or stop a deal? [snorts] Yeah, I just don't I don't see any blind spots, Paul. You know, one thing that, you know, comes up in these deals is the mindset of the owner. You know, are you ready for this? I mean, we explain the whole process and exactly what's going to happen and, you know, knowing the market as well as we do, we can say, well, you know, this is what this company's going to want.
This is what this company's going to want. And and you have to accept that, right? Because If if you're going to try to sell the company and leave the next day, you're not going to find a lot of buyers. If you want to leave in a year, you'll see some more buyers. If you want to leave in two or three years, you're going to see a lot of buyers. And so, it's that mindset that, you know, if you're going to go with this company, they're going to have you sign a fiveyear non-compete.
And then, you know, you get into the process and say, I only want to stay a year. It's like, well, let's stop, you know, and so it's really getting that mental buy off from the seller that this is how we're going to go, this is what we're going to do, and then execute, right? It's it's all about execution. But going back to the original question, I we I don't see any blind spots. I don't know if Joe if you agree or disagree with that, but you know, it's pretty it's pretty straightforward.
Yeah, I agree. I have nothing to add on that. All right, let's conclude with a conversation about the staffing shortage we have. How does that show up in your deal negotiations and are buyers applying discounts or pushing back more than in past years? If a company is struggling to recruit therapists, I think they're looking more at the overall staffing census of a company. Than they had been say three four years ago. Some of the biggest impacts are going to be okay what's your overall turnover looking like and what's really that average tenure of your professional staff.
Actually not even professional staff even your front desk personnel. There are a lot of people invol every person in those clinic locations that they do they do matter. They may not all generate revenue but they matter. So we wouldn't say discounts being applied but there could be times where say you have three, four therapists leaving in a two-month period and you want to get out to market. Well, what's going to happen is your numbers are going to dip. You just lost a sizable portion, talking about, I don't know, maybe you lose 5% of your staffing with that.
You just lost a sizable portion of your clinicians. Numbers will probably take a hit. It's not going to lead to an effective process. And that's where discounts can possibly be applied where those numbers start hitting your financials two, three, four months down the line. At which point you're in the diligence process and you're trending downward. That's that's something that's going to lead to some delays. Tom, not sure if you had anything to add there. No, you know it can impact some Paul because you know if you're if you're a buyer, you're saying why are people leaving?
Like why are people leaving and why aren't you able to recruit new people now? Now you just have you can just have some situations where you know to couple people went on maternity leave. A couple people said, you know, I don't want to do this anymore. I'm going to move to Colorado. So you just want to make sure it's not a cultural problem and it can be, right? But we've seen a lot less travelers, you know, temporary staff, they're still there, but nowhere near where it was a couple years ago.
And even the pricing for that has come down because you know back in you know 2020 2021 I mean you could charge whatever you wanted because if you didn't have a PT or PTA you couldn't see the patient. So it's as Joe mentioned it's still a discussion point and you know if there are a lot of travelers a lot of temps you got to take a step back and say why. Yeah. Yeah. Are are there things that you see that companies that seem to not have any real difficulty attracting and then retaining staff as opposed to companies that you may work with that seems to just always have that staffing shortage and can never get caught up.
What are the companies that are keeping those PTs and are able to attract those physical therapists? What are they doing differently from the companies that just can't seem to keep their therapists? They're they're getting in-house recruiters, okay? And you know people that are there in the office understanding the business talking to therapists on you know why you're here you know how do you like it recruiting it and then they're selling that right because really what you're selling is culture and so the companies that have their own in-house recruiting function are doing really well and you know the others are using recruiting companies and techniques right they're using LinkedIn and Zip Recruiter and other you know online tools like that.
But that I think that's what we're seeing and where we're seeing the success. Yeah. Yeah. Yeah. And moving into the future, do you see this as a tipping point for this industry in you know having the ability to have that supply for the demand that we're seeing out there? How do you see this impacting you know this industry in general in the future? Just the staffing shortages or Yeah. Yeah. Like Tom had mentioned, it's been getting better over the past couple of years. Hopefully it keeps trending in this direction.
But yeah, it is probably a bit of a tipping point, but if you can really attract and retain those types of quality clinicians, you're going to be set. And attracting them through those various recruiting measures or having in-house recruiters and retaining them through a positive culture where people enjoy coming to the clinics and treating every day. Those are going to be some of the key ways to really attract and retain staff and lead to profitability in those clinics. But in the future as again as more universities kind of keep dishing out therapists hopefully it gets to the point where people coming into the industry exceeds the amount of people who are retiring.
That's something that really hurt with co and it took some time to realize but if those tides turn hopefully the trend keeps going in positive direction here. Yeah. Yeah. Yeah. Joe and Tom, this has been awesome and I really appreciate you providing your knowledge with our visitors today and our audience today. If anybody out there has a question for Joe or Tom or for myself, just click below and we can talk. And Joe and Tom, thanks very much for joining us today. Great to be here, Paul.
Thanks for having us. And for all of you out there, thanks for joining us and have a great rest of your day. And a great weekend and we will talk to you soon. Take care.
Want to talk about your own business?
Marlton, NJ 08053