Why 2026 Could Be One of the Busiest Years for Rehab M&A
Paul Martin shares his perspective on a potentially busy year ahead for rehab transactions.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello and welcome to another episode of the Martin Rehab M&A Advisory. I'm Paul Martin, founder and president of Martin Healthcare Advisors, and I am super excited to share my 2026 predictions for the outpatient rehabilitation industry. We're going to focus on merger and acquisition activity, growth opportunities, as well as technology. I'm going to walk through what we see coming in the year ahead. This is going to cover who might be buying companies, who might be selling or recapping, and which companies are likely to be the most active and where growth is most likely, including technology advances.
What is your opportunity to open new clinics or partnership with hospitals or physician groups and much more? So my goal today is to best prepare you so that you can best prepare for your company in 2026. Okay. So quickly we're going to go back to 2025 because I did my recap there. We called it a transitional year and it really was for healthc care in general mergers and acquisitions and especially for our rehab sector. Deal activity was very cool, you know, not real hot in the first half of 2025 and that was amid high interest rates as well as market uncertainty.
Private equity groups do not like uncertainty. But momentum started to pick up towards the end of the year. You know, in fact, Q4 saw really a surge in health care services deals overall, and I believe that's a signal that the M&A window is absolutely finally creaking open in the rehab industry. Private equity owners in particular started finding opportunities to exit investments after a very long dry spell of many companies who have just held out. And that even meant if it was selling a bit earlier than usual in their cycle.
Pitchbook, which is a data source that we use almost every day. They showed more private equity firms selling company in under three years of ownership in 2025 than they did in 2024. That's a sign that investors are eager to return. You know, typically they're going to wait five years. These were three years and less. They want to return capital to their limited partnerships while a window is open. Now, and overall, United States private equity exits in 2025. We're on track to beat both 2024 both in count and value, which is a welcomed recovery after a definite slowdown in 2024.
On the outpatient rehab side, 2024, it also brought tangible improvements in business fundamentals. After years, and as I just find it, headwinds going all the way back to pandemic disruptions to Medicare fee cuts. The tide is definitely turning. By mid 25 we saw industry leaders reporting rising patient volumes as well as stabilizing reimbur reimbursements. Now, nobody's jumping up and down about the reimbursements in this industry, folks. Don't don't get me wrong, but we are seeing some stabilizing. You know, notably, and we follow US Physical Therapy on all their earnings calls, they blew past their expectations back in Q2 of 2025, which suggests that the market had hit its bottom and was beginning to rebound.
Many rehab operators adapted through very tough times by doing the best they could to renegotiate payer contracts, working to control costs, and we've really pressed this, embracing new service lines that touch and have a big piece of rehab within them. And these are efforts that really set the stage for better margins and re renewed growth now going into 2026. So in summary, by late 25, we saw and could feel improving deal conditions and stronger operating performance in outpatient rehab. So now with that context in mind coming out of 2025 let's head to 2026.
Look myself my team we are confident that 2026 will be a year of major acquisitions and consolidation in the outpatient rehab market. All the ingredients are there. First of all, the fundamentals, which I talked about, are finally beginning to turn more favorable. Patient demand continues to rise, and that's thanks to the baby boomers and extremely active lifestyles. I participate in that. I probably get injured about once a month. I visit physical therapy often. Reimbursement pressures are easing slightly depending upon your market for the first time in many years.
And as I did a whole show on, Medicare has planned a very modest 3.3 to 3.8 fee schedule bump for 20126. Staffing challenges are slowly stabilizing in some markets and that's not researchbased. This is from direct conversations at the private practice section with many companies that they are starting to feel the staffing challenges to lessen. And clinics that we storm are now leaner and more efficient. And they're getting help from technology, smarter scheduling, even AI tools that are enabling therapists to treat more patients per day with the same focus on great customer care as well as great patient care.
And I really believe that this combination of things, more volume, flat or improving payer rates, better productivity, it's beginning to boost margins across physical therapy providers. And as investment bankers put it, the bulls are running. The PT sector is finally gaining traction after a fairly long slump. I think secondly investors have noticed these improving fundamentals. We are pressing it out there to these private equity groups that the fundamentals are improving. And so when profits begin to go up, so does buyer interest. Many PE firms that have invested in physical therapy platforms around the pandemic back 2019 to 2021 and trust me there were another a number of them.
They have been waiting for the right moment to sell and 2026 may be that moment. You know, our team is predicting that 2026 is going to mark the beginning of the next big consolidation wave in physical therapy. You know, usually when we talk about waves, it involves the big companies and that's what we believe we should start to see movement and real traction from those big companies in 2026. And again, driven by those stronger fundamentals, better valuations on the other side. We're, you know, already, you know, just a couple days into 2026 and we're hearing undertones of deal processes starting to gear up.
You know, if you look at the broader healthcare merger and acquisition market, it echoes this same optimism. Our team expects deal making to accelerate meaningfully in 2026 as we're seeing highquality cashgenerating physical therapy businesses that will be coming to market and will attract interest from strategic buyers that are backed by PE funds or some direct to private equity. We also have interest rates leveling off and credit becoming more accessible. So buyers who sat on the sidelines are ready to move. So in short, all signals point to robust deal activity in outpatient rehabilitation in 2026 as of today the way the economic climate stands.
And it possibly could become one of the busiest years we've seen for a long time in mergers and acquisitions in rehab. All right, so now we've kind of outlined the big picture. Let's dive into some more specifics on who might be selling, who might be holding off in this current environment. You know, which companies do we believe will recap in 2026? Remember, a recap is a private equity group essentially selling to another private equity group. And based on what we're seeing, a lot of the private equity outpatient backed rehab platforms that are mid to late in their hold period, typically around five years, they're going to potentially take a look at this market.
You know, remember many acquisitions in our space were done preandemic or in the 201819 range. Those owners, those investors now have held on for six, seven or even eight years and they are looking for liquidity. You know, roughly 30% of private equityowned companies across industries, this is the big picture, are now 7 plus years old in their funds portfolio. And rehab is no exception. So this is not just a rehab thing. This is an allmarket thing. So with the market improving, I predict we're going to see several of the large regional or national therapy networks head into the market for a recap.
Sponsors are feeling pressure to show returns. So even some companies that were 3 to four years ago acquired so pretty new in their cycle also may look at the market if their performance is strong enough at this stage and more than likely any of those would come much later in 2026 or potentially into 2027. So look we're going to talk just about a couple companies and these are companies that have you know been in the in the news. Okay. And some of these recent platforms have really doubled down with new funding and those companies will likely hold off on an exit.
You know, they went out and they raised funds as opposed to recapping. You know, Ivy Rehab is a great example. Major multi-state physical therapy network. They secured a continuation fund investment with its sponsor WAD Capital. And that was back late in 2022. And that essentially gave Ivy the opportunity and the capital to continue to grow instead of recapping to a new private equity firm. A company like that which just recapitalized internally is less likely to seek you know an outright recap or a sale in 2026.
You know, similarly, there are some firms that may opt for partial exits, and that's in order to get liquidity while still retaining control. And I think there are companies out there that are strong enough and bold enough to potentially make that happen. And of course, a few strong operators may simply decide, hey, we're better off waiting another year or two after looking out into their market. They may think their EBITDA will be much higher based on some of the reimbursement changes and that would be especially if they don't get the valuation they want in 2026.
You know, but all that being said, I suspect that most owners who have been holding on since the boom will view 2026 as a window that they do not want to mix. So to sum up, this is kind of the big cap, the big market. I would expect a flurry. You know, we're not talking five or more, but a few, okay, something we can count on one hand of recaps and sales in the big market through next year. And I think some of these long-term longtime owners are finally seizing the chance to exit and they're going to take it.
All right. So, let's talk about who will be doing the buying in 2022 26. Who are the likely acquirers? I see it like this. Without naming, you know, specific companies, the legacy consolidators that kind of sat out a lot of 2024, and there were a few, they have seemed to regain momentum and access to capital. We expect several of them to re-enter the market, and this is on the buy side, with more discipline than before. And I think the same is true for a number of companies that attempted to recap over the last 18 months.
Many of those processes stalled, but they're likely to return to the market as buyers in 2026 as that broader M&A window opens and investor appetite improves. They want to be viewed as a company that can acquire, digest, improve, and move forward. You know, at the same time, newer platforms that launched in the last couple of years, they're going to be tested. Most have not executed meaningful add-ons, you know, three to eight million of EBITDA add-ons. And now they'll need to compete not just on price with the legacy companies, but on integration capabilities, speed, and how compelling their story is to sellers.
You can't just come in with money in this industry, as you know, as physical therapists, and I'm a physical therapist. You can't just throw money at these physical therapy owned large companies. They're they're going to need more than that. We're not relying on third-party legal tables to figure out who is active. Just so you know, we talk to these firms directly. We see who is circling with real intent and who is just trying to stay relevant. And that difference will really show up as we move into 2026.
I think in 2026, acquirers are going to be selective about quality, but they're going to be generally open to various sizes of targets from small, you know, let's call them one-off clinics to sizable regional players. You know, on one end, smaller practices and local clinic groups will continue to be acquired as what we call add-on acquisitions. Those that are prepared and buyers love these, you know, they call them tuck-in deals because they can fold a one to three, two to five clinic group into an existing platform and continue to dominate a market.
And with outpatient rehab still highly fragmented, again, the fi top five to six companies combined only control about 10% of all the clinics. There is a huge pool of small independent clinics out there that are starting to operate more successfully. So any platforms aiming to grow can find plenty of smaller targets in new markets or to grow in current markets that they're already in. And these opportunities we believe will remain attractive, especially if these are well-run, profitable clinics, strong local referrals, and a great story. On the other end, I predict and my team predicts that we're also going to see an interest in larger deals, the kind that have been relatively scarce lately.
You know, if financing costs ease and earnings are up, some buyers will chase these platform level acquisitions. Let's call it these companies in a $3 to8 million EBITDA range. And these bigger companies give an immediate boost of scale to these larger platforms. And these companies historically would sell for extremely high multiples in some cases 10 or even more. So, it will be interesting to see if those kinds of multiples come back in 2026 or they make it up in other areas on the structure. But importantly, across all sizes, quality will be king.
I promise you that investors are going to seek high quality cashgenerating businesses with clear glo with clear growth plans. In addition, a very strong payer mix is always a an a value booster. Efficient operations and growth potential and a growth story is absolutely paramount and targets businesses that can check these boxes whether it's a you know three to five clinic group or it's a 100 clinic platform they will be the most soughta I promise you this an acquirer would rather buy a small very well-prepared company than a large company that is somewhat of a mess most acquirers we still believe will be a bit cautious after the challenges of some of the recent years.
So to wrap this up and move on to tech and innovation, I think the sweet spot will be wellrun outpatient rehab providers, big or small, that can plug into a large system and thrive. Owners willing to stay on and be a big part of the company moving forward. We're going to see a lot of small add-ons and possibly a few headline grabbing larger acquisitions if the conditions remain favorable. All right, now that we have covered M&A predictions, both buy side, sell side, let's switch our gears now to some growth opportunities and let's start with technology.
Look, you can't do a 2026 prediction without talking about technology. It's going to be a key growth opportunity in 2026 for outpatient rehab. We've already started to see clinics embracing tech in very recent years and I anticipate this will accelerate creating it's going to create both operational improvements as well as new business lines. And one of the big areas is clinic productivity and efficiency. And I think these companies that are driving that at the forefront are as opposed to simply technology, this is a tool to drive productivity and efficiency.
That's the key. And I think many therapy providers are now implementing these AIdriven tools as well as smarter software. And they're doing that to streamline scheduling documentation even parts of treatment planning the very basics you know for example AI assisted scheduling and digital intake can reduce noshows and keep clinicians calendars full. We have been seeing that over and over again. And as we look back at our clients in 2025 and now moving into 2026, the introduction of these te tech upgrades has already led to real live productivity gains.
Therapists are treating more patients per day, extended patient access, and lower cost per visit. So in 2026, continuing to adopt these tech solutions to better in to include better EMR systems, machine learning for administrative tasks. Who ever thought we would be doing that in rehab? It's going to be crucial for growth. And it really helps solve some of the labor issues by allowing therapists to handle a bit more volume with less burnout thereby boosting revenue and margins. I'm not a big one on you know tech and AI replacing a body a human but to support those humans I'm in I'm a big believer in that.
I also think we're seeing expansion of teleaalth as well as virtual rehab services. You know the pandemic jumpstarted teleaalth and teleaalth or telep while inerson therapy remains the core teaalth has proven it can supplement care effectively. I really expect providers will invest more in tea rehab platforms as well as remote monitoring tools as well as mobile apps. You got to be on top of the technology. And these things are being used to keep patients engaged outside of the clinic. You know, for an example, some companies use apps where patients log their exercise and pain levels and therapists can monitor this progress remotely.
Huge, huge help. And again, this is not only adds this doesn't only just add value for patients, but it also could become a revenue stream or a differentiator for clinics. And this trend is clear. Teleaalth usage of PT is way up post 2020 and is continuing as patients have gotten used to virtual options. And I think this is especially for follow-up visits or certain types of consultations. Virtual visits can increase a clinic's reach again by seeing people who live far away, can't get into can't get into their clinic or do not have any access or transportation options.
In addition, there's interesting innovation in areas like wearable rehabilitation devices. I think we're going to see more of that. Virtual reality and augmented reality for therapy services as well as data analytics. In I think in 2026, we're going to see more clinics partnering with digital health startups or adopting gadgets that enhance therapy because then it becomes theirs and it becomes trademarked as theirs. Private equity and venture capital are also investing in software and services that support care delivery. You know many examples outcome tracking for AI based patient triage.
These are of innovations that could become growth opportunities also for outpatient rehab businesses especially by improving outcomes, attracting more referrals or creating new services offer offerings that competitors don't have. Look, here's the bottom line on technology. It's a major growth level lever. Clinics that leverage AI, leverage teleaalth and other digital tools will absolutely see better efficiency, higher patient engagement and potentially new revenue streams if they are used correctly and they are measured and that the measurement tool that is being used is driving that productivity, driving your margins.
So, let's talk a little bit about, you know, how you might use 2026 and how I'm predicting that we're going to see a lot of new clinics, startup clinics in markets. I'll tell you this, big companies are preparing to go back to opening new clinics in 2026. We've already seen signs of this major shift. Recaps that earmark funds for expansion. So we can see where they're putting funds for startup expansion. They're making leadership hires in growth markets and they're increasing site development, new clinic development activity.
We already started seeing that in two in quarter 4 of last year. It's not fullcale roll out yet like we saw back in you know 202122. But with more patient demand that gives outpatient companies an I an access to open and become busy if they can find the therapists. So I think as a local operator, independent operator, this is your signal because here's the truth. As a private operator, you are in a better position to do this than the big companies. You know your market, you know your physicians, you don't need a long integration plan or layers of approvals to move on an opportunity that you see.
And yes, you can do it with discipline. A new clinic doesn't have to be a massive investment. It starts with data. Look at your zip code analytics. Where are patients coming from? Where are your strong referral sources? And match that with in-person work. And visit some of those local docs, go into that community, really understand what you are going to be coming into, get those referral sources first and you can do a new startup. The demand is there. In fact, in many areas, it's never been higher.
If you wait on this, you're going to leave it for somebody else. You're going to see one of the large companies opening up in and around your market. All right, last let's go now from new startups to partnerships with hospitals as well as physician groups. I know we're not all, you know, cheery about that, but let's talk a little bit about that because I think we're going to see more of this in 2026. We're going to see collaboration between outpatient rehab providers and large health systems and hospitals.
We're going to see it. This really can take several forms. It can be a joint venture. It can be a management services agreement or it could be a referral partnership program. But the driving idea is the same. We integrate outpatient rehab with the broader care continuum in a way that benefits both sides. That's how we are able to do these hospital contracts. You know, one factor really pushing this is the ongoing focus for hospitals to streamline and cut costs. There are hospitals that are under intense financial pressures and are re-evaluating which services are core and which are not.
There are many hospitals that operate their own outpatient therapy departments both in the hospital as well as external sites. But some are finding it's more efficient to partner with specialized rehab companies like you guys instead of running it themselves. We'd seen health systems selling off noncore units like home health or labs. And that's to focus on their core services, what they're really good at. And rehab could be next on that list as outsource services. If a hospital can joint venture and go under a management services contract with a proven outpatient physical therapy provider like you in your market, they almost always will improve not only the quality of the patient care that's being delivered, but the profitability to that service line.
So for the rehab company, it means a built-in referral stream and possibly using the hospital's brand or physician network in order to get more patients. So it is absolutely a winwin. Going back to my first company all the way back in 1989, we did four large health system contracts. That was at least a third to somewhere between a third to a half of our EBITDA when we sold our business and we got the highest multiple that was out there at that time. You know, another catalyst to this is a move towards we've been beating this door for a long time.
We will see what happens. But we call let's call it sight neutral payments. There's been policy discussions in 2025 about Medicare paying the same for services whether delivered in a hospital outpatient or in a freestanding clinic. And if site neutral reimbursement comes to pass or even looks likely, hospitals lose that advantage of billing higher rates for outpatient therapy. Now, I don't know if this happens in 2026, but it's in 2026, you should be looking at it because this gives them an incentive to offload or partner out their outpatient therapy units to very specialized operators now before any policy changes erodess their margins.
So in 2026, I think some of the more forwardlooking health systems will proactively strike deals with rehab companies, and that's either selling their outpatient clinics to them, forming a joint venture, or contracting with them to manage their outpatient physical therapy. And this allows hospitals to focus on what they do best, acute care, while at the same time ensuring that their patients still get top-notch first class follow-up therapy externally. We should also mention physician group partnerships as a potential growth avenue. Orthopedic groups, for example, they often refer tons of patients, as you know, to physical therapy.
And we might see more formal alliance where rehab providers partner with an orthopractice or sports medicine group to colllocate clinics under a structure that is typically a management services agreement all based on and under the Stark rules. And these are relationships that can secure a very steady patient pipeline for the provider or for the physical therapy provider and offer convenient one-stop care for patients. Look, you know, if you have a large physician group and you are going to lose that physician group to somebody else, you really have to think hard before you just let that slip away at how you could make this work.
So overall, partnerships with larger health care players can significantly boost growth for outpatient rehab companies in 2026 if we take advantage of it. You know, by aligning hospitals, big physician groups, rehab providers can increase referrals, you can enhance credibility and possibly take on more complex cases when you get intermixed with those hospital systems. All right, so let's wrap up. I want to emphasize I am very optimistic about 2026 for the outpatient rehab industry. We've had a couple challenging years, but we've have lots of po positive trends that will propel us forward.
Merger and acquisition activity is very likely to be at its highest level in years, fueled by strong business performance and investors that are eager to put their money to work. As I noted, we are calling 2026 the year of acquisitions in physical therapy. We're going to see consolidation accelerate. At the same time, growth opportunities are abundant as well. And I believe we're going to see physical therapy businesses taking a look at these opportunities. So, for all of you out there who are looking into 2026 and wondering what opportunities to jump on, if you'd like to have more conversation with me about what I've put out there to you today, just click below and let's talk. Have a great rest of your day and a great weekend and I look forward to coming back to you next week.
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