What Buyers Notice First in Your HR Infrastructure
Paul meets with Larry Zekhtser, Lian Amado, and Kristen Minihan from ADP to discuss how HR infrastructure evolves as practices scale, and how buyers tend to evaluate it.
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. Today, really exciting because we are going to dive into an area of your business that most business owners just kind of want to push to the side. But the folks we will be talking to today can tell you how important those HR functions can become in your business. And that's for growth, employee retention, and for an eventual potential M&A event. So I'm so excited again to welcome today Larry Zekhtser, Kristen Minihan, and Leon Amato, all from ADP.
So welcome, guys. Thank you. Thank you for having us. We're excited to be here. Awesome. Great to have you guys as well. You know, when physical therapy business owners hear ADP, they immediately think, well, that's just payroll. But from your perspective, what do they commonly underestimate about how HR and workforce systems impact profitability, scalability, and eventually long-term value? What are your thoughts there, guys? Yeah. So, that's a super common thought process, right? ADP at the core is a payroll company. That's true. But payroll is just the transaction that happens.
There's so much more that goes with it. I think we did a study not too long ago that only about 18% of our business is only payroll. So, there's a lot more we can handle. What does get underestimated is how much workforce systems drive profitability, scalability, and valuation. The biggest controllable cost actually is labor. And without having things all integrated like timekeeping systems, scheduling, HR data, clinics lose margin over things like overtime, inefficiencies, and unfortunately turnover. As they grow, these issues get larger, right? So, when you're starting out with one clinic, stuff could be pretty simple, but having the predictability and clean processes, compliance system, and clean books make them not only operate better, but actually worth more.
Yeah, you know, I look at that as kind of that funnel to the bottom line, right? And that funnel you want open on the expense side and the labor side. And what happens is things that are somewhat out of the owner's control because they're not looking at it every day just balls up and then it all, you know, gets at the top. You know, for most labor is the largest expense for just about, not most, all PT practices. So, how should owners think about gaining real visibility into those labor costs by clinic, by provider, by role, and where do you most often see kind of those hidden margin opportunities?
So I would say the key is actually breaking down those things by clinic, by provider, by role and measuring it against the patient volume of the clinics. And a lot of times with those hidden margins, I think I've used this analogy with you before, right? If your sink is leaking, you could see it right away and get it fixed. But if there's a leaky pipe in the wall, that one's going to go unnoticed. So having a system that's going to be all in is going to be a chance to see where those leaks are as well.
And as things creep up, you just want to make sure that staffing matches patient demand. And don't want the supporting roles of them to be inconsistent either. And I I'll also I will add to that you know typically business owners they're quick to look at a P&L but not to toot our own horn but with our technology every time we show an owner our data and analytics they are blown away at the statistics around how much they're overspending in overtime how much they're overspending in turnover how much turnover is actually happening.
So I think the only way to not lose sight on that is to actually have true data and analytics for oversight for the business. Yeah. And both Lean and Larry have talked about you know different pieces that create margins where there can be a gap and where you can lose money. And there's another piece where it's kind of underestimated like what's that margin where you can make money. You know and a huge piece of that that's understated is employee development. You know, and for employees from one practice to another it can feel like red fish, blue fish because typically you're doing the same job day in and day out.
But to an employer, there's really an opportunity because you're hoping that employee that you hire that you spend your time, energy, effort, you know, hiring and bringing on board, you're hoping that they bring over a loyal client base. You're hoping they're a great employee, that they bring over people that are just like them. So realistically, it's an opportunity. And something that we hear a lot from PT practices and even other businesses is when we ask about turnover, they say, you know, employees are seeking a better opportunity.
And I think a huge gap there is how can your practice be that bigger and better opportunity. What are you investing in retaining your employees, keeping your employees, developing them, providing a clear career path to show that they're valued, they're cared about, you know, they're an essential piece of the organization. And that's a catalyst that a lot of people again get stuck in the weeds of tactical HR where they don't have the time to devote to that, you know, and it's really the money-making engine of your business is the people that you're hiring.
Oh, for sure. And it seems as though that people will leave and the owner never really knows why that person may have left. And typically where they are going there's a better culture and that culture a lot of these things drive right into that culture. We've also seen a lot of you know I can remember my first clinic we had a front desk person I had a you know a tech and me not a whole lot of HR to manage. But as you start seeing companies grow from one or a handful of clinics to 10 clinics, 20 or even more locations, what operational breakdowns as it relates to payroll, HR or compliance tend to kind of quietly erode that bottom line?
Yeah, absolutely. So growth, it's so positive, but it can expose cracks. And if you don't have a clear path to standardization, you're perpetually in a reactive stance. And that's not the place that you want to be in a in a business. You want to be on the offensive and calling what your next move is rather than dealing with what's thrown at you, being a little bit offput and having that take up a lot more time than you'd expected. But a lot of times we see these breakdowns usually around compliance and actually developing, you know, your practice and individual employees.
So, let's say if you get hit with a fine or some type of, you know, unforeseen item in another state that you had grown into and you didn't realize that you needed a certain withholding or tax ID. You know, that's going to take up your time in doing the research because you didn't know that information to begin with and then take away from actually fueling the company and developing things that matter like culture, development, performance, reviews. And I think the easiest way I like to describe it is you become in a fear state rather than a fire state.
And we want your business to be in a fire state where you're catalyzed to grow and catalyzed to get better rather than, oh my god, when's the next find coming up or just the unforeseen. You know, there's so much when it comes to growth that you need to have the right team and the right vendors and the right support system that know how to help you navigate so you can do what you do best, and that's growing your business and working and living in your business.
Absolutely. I want to add a little bit to that. There's a few like certain areas where I feel like you really see the erosion happen. It's like we're going to keep sticking on like your talent. That's your biggest either expense or profit, right? So, bad hires, long rehiring cycles, excessive recruitment. This is high turnover because there's no performance management going on. It's like you don't think that you really need to review your staff, but you do really see if there's a true ROI with them. How productive are they?
Inefficient processes. People don't really have workflows in place. You think maybe only having 10 or 15 people, you don't need to have like an HR system, but if not, this is where the gaps come in. And this is what drains the cash and the productivity, right? Versus having efficiency and ROI. Sure. Yeah. And just like on that HR side, something simple as simple as like inconsistent onboarding, mclassification, lag in compliance, that stuff's really going to chip away at the margins and create a lot of inefficiencies.
And this is not something that people like see forefront, right? Like you open a business, you're really good at what you do, but how about all that other stuff? Yeah. Yeah. Yeah. And just to pin up real quick what my colleagues had said, I worked with I worked with a law firm and the way that law firm did their reviews is they literally would go off of you know what's the billable hour for this person and then how much do they generate in revenue and if you don't feel like you have a grasp on that as a PT business of how much am I paying to support this person per hour but how much are they actually generating that's something that I would highly recommend you know that you get that data and you get those numbers.
Number. So then you know like hey who are your most profitable people? Where are you investing the most time and energy? And how can you make those other you know other employees on your team? How can you make them better performing when it comes to revenue and driving a bottom line? Sure. So it sounds like a lot of visibility into the metrics involving staff becomes really important. So you know a lot of practices still rely on very manual processes to do these things as well as disconnected systems.
What risks do you see that creates operationally and financially? And I think this especially is true when a company starts to scale. What do you guys recommend there? Yeah, disconnected systems make it really hard to run a business with confidence as you grow. Leaders end up making decisions on data that's incomplete or maybe outdated. Compliance becomes a reaction instead of being proactive and making sure everything's in there. And I think a lot more time ends up being spent on fixing errors. And then financially that shows up as higher admin costs, greater exposure to risk, which is never fun.
And the scaling becomes actually slower and a lot more expensive. And also like there's always more likely a chance of error when it's a human error or manual process, right? So, and no offense to like any of our sherm certified HR people listening, but people don't really go to school anymore to like learn about how to handle payroll or how to do benefit administration, right? So you're putting someone that's not really qualified to handle payroll and people think it's a small line item, but you mess up one payroll thing.
You have an upset employee. It doesn't look professional, right? So at the end of the day, you end up overspending. Now your payroll person is wasting time fixing the payroll. So it's just not and then and then what happens if the payroll person leaves? Now you have a process that can drop and now no one gets beat on Friday, right? So it's just at this point it's like not the way to go anymore with manual or human processes when things can just be automated and save time and money.
Absolutely. So from a buyer or a PE private equity perspective, what does you know kind of clean and audit ready mean not for financial but when it comes to payroll HR and compliance documentation? Yes. So for me clean and audit ready means that payroll and HR and compliance all live in one system. Right? When you look at what the payroll looked like, what the tax filings look like, they're going to match up, that all the records are current, certifications are in, compliance documents are actually just easy to produce.
They could be pulled within minutes. And fundamentally centralizing things like that makes diligence move a lot faster because you know there's less risk in the business and I would say it helps with keeping the enterprise value higher because you know everything is done the right way and you're not taking on problems. Yeah, and I would add to that like just making sure that there's no sitting liabilities. I think I'm traumatized when it comes to working with clients in New York, but it's like I think of New York, I think of workers comp because New York is like the strictest with it.
It's like are your are your employees being coded correctly if you had a workers comp audit, right? That's where we see fines happen the most. Are you compliant locally in the state, federally with wage, with tax, with benefits? What about sit and sooie? It it's all these little things even the small things like correctly putting the I9 employee files like where are those located? Like an owner is not going to think about that stuff, but especially nowadays audits happen and this is where these little gaps that we've been talking about pop up.
Yeah. Yeah. And we were talking just making a business packageable. Like you should always be audit ready. You should always have it packageable in a sense. You're still a key pivotal role to the business, but at the end of the day, you should act like somebody could come in and take your seat tomorrow if for whatever reason, let's say something popped up in your life, you fell sick, anything could happen. You should always have your business be in a packageable place so that if somebody needed to take your seat for whatever reason, they're ready to step in and do that.
And if you don't feel like you're there, you know, prioritize it. It really is important. And you know, it's okay to stop and make changes and go slow to go fast. Sure. And it seems on our side when we look at a company, it's sometimes pretty obvious if there are operations from the clinical operations or there are, you know, front desk operations that aren't really in sync. But when it comes to payroll, HR, and you know, some of that documentation behind the scenes, there's no way for us.
But let me tell you, buyers are going right in there, and that's when something comes out and it's a uhoh, didn't know that was there. So, yeah, those are some of those things that are just hidden that look, many practices are doing fine, but when it's found, it's a bad thing. When we talk about multi-state growth and many of our companies that are in a growth stage are, you know, going into new states, what are some of the biggest compliance or tax mistakes that you see owners make as they start to expand across state lines?
And why are these then, as we've just discussed, difficult to kind of fix later on? So, yeah, I'll take this. This is something that we actually come across all the time, right? There's there's very few times we're not deal dealing with something like this. I think a huge mistake comes from just assuming payroll is payroll and labor rules of labor rules. Sorry, really tough to say it together. I think stuff like mismanaging tax registrations, you know, things in Florida and New York are very different. Classifying employees incorrectly, not looking at state specific rules, overtime rules might be different in different places.
Paid leave might be different in different places. All this stuff goes unnoticed until that audit happens or expansion triggers a review, but once those errors compound over time, the back taxes, the penalties and legal exposure become terrible. Most compliance like it's not super intuitive. So, it shouldn't be something that you're learning through trial and error. You want to get that done from day one correctly. And a few a few examples come to my mind. I think of one specific case where we had a client that I don't know why New York is the trend on the conversation, but they went into New York, there was a small lapse of coverage in just the time with getting the workers comp set up.
They had a $19,000 fine. They couldn't backtrack it. They had to pay the fine. So, you know, just making sure that, you know, you're set up with things like this. Especially in the tough states. I also think I used to actually work for an accounting firm. Like CPAs, they don't want to set up the sit or sooie. They don't know the law in every state on which states you need the unemployment tax. You don't need it everywhere, right? So having somebody in house that knows this or is qualified to be able to find out an answer as well.
And I will say one thing that we could probably all agree that comes up a lot with all of our clients is there's this tricky area that I feel like even our CPAs are have a mix of answers is like where should employees be paying taxes? Is it the state that they live in or the state that they're working in with this remote era? Especially with PT firms, you're growing, you know, you're growing into other states. Sometimes you're sending people to other states. So, and it's a new it's a new trend that's going on, right?
So, and everybody has a different opinion on doing it. So those are just a few examples that come to my mind. Yeah. Like I'm literally working on one right now where companies right on the border of North and South Carolina, employee lives in North Carolina, works in South Carolina, and not going to mention what payroll company, but I'm that I'm pulling them off had that all backwards. So, now we have to go they have to go back and fix all that. But I'm making sure when I'm bringing him on this week that everything's going to be perfect.
So Larry, I know you can fix that problem, but can you say labor rules three times fast? Labor rules. Labor rules. Labor rules. I That's way too slow. That's way too slow. It's a tough one. He's gonna go on. Listen, I moved to America when I was three. English is my second language. So recruiting and retention is a major challenge in this industry right now. How can you know you have culture, you have lots of other things that add to that and you know what kind of patient flow etc.
How many patients are they expected to see a day? But how can benefits strategy and a PO model realistically improve retention and culture for PT groups that are competing and they're all competing for talent. Yeah, absolutely. So benefits matter more than ever. Again, anybody looking for a job in this market is going to compare that and consider that as part of their offer when they're looking for like a well-rounded business that's going to care about them, take care of them, take care of their family. And really when it comes to a PEO, a PEO allows smaller and midsize PT groups to offer more competitive enterprise level benefits when it comes to health care, recruitment, HR support without having to carry the full administrative burden.
You know, we were just talking about the compliance and how it can get kind of convoluted when you're in other states. Having a PEO fully eliminates that burden from the employer directly. And the whole concept of a PEO is the fact that you share liability. So ultimately, we're there to help you to guide you and then you fall under that PEO's EIN. So, it's our responsibility. We have all the registrations in all 50 states. So, you as the employer don't have to carry that burden. And if anything does come up, again, we share liability.
You're under our EIN. So, we're going to help you navigate whatever it is, you know, through the HR support teams and our legal teams. So, beyond benefits, it just creates better consistency, on boarding, clearer policy, faster issue resolution because then you can literally have I almost think of like a PEO or having an outsourced HR team as like having your own little minions where you can go to them and bounce them bounce ideas off them like a sounding board and make sure that you're doing the right thing for your company.
But really the benefits in having that positive employee experience impacts retention and culture. People start making assumptions about the company from the second that they go through the hiring process with you. How quick are you to turn around interviews? How communicative are you? You know, can they tell that you like them? Are you giving them positive feedback? Are you keeping them in consideration throughout the process? Are you telling them no, they didn't get the job? You know, these are little things that I think people are missing out in the process, but people are making assumptions and judging your company from the second that they go to consider applying to you.
Do you even respond to that application? What is the on process look like? And I think the biggest thing I can say when it comes to, you know, having strong benefits or considering a PEO is think of your business as buying a luxury car. You know, you're not going to buy a luxury car and then put regular gas into it and assume that it's fine. If you're going to go out of your way and get a luxury car and you know this is a high investment item.
You're going to put that premium gas into it and you're going to get yourself the insurance assurance and longevity to know that hey, this is going to last me for a while and I'm doing the right thing. You know, to grease the wheels. Yeah. I'm gonna add to that, too. So, I think that the statistic is that companies that are that use a PEO are 70% more likely to not only stay in business longer but be successful. And I think this is a good time to just add like the ACA change is happening in 2026.
Everybody needs health. Healthcare is not affordable anymore. And it's no longer like a nice to have. Like a company has to have benefits. Like I think even like when I became an adult and I needed a big girl job and I needed benefits like that was the first thing I looked at more than even like how I had a qualifier the requirements. It's like I want to make sure I'm going to get what I need you know out of the company too. So yeah PEO tends to be the way to go especially for smallsiz businesses.
Quickly define PEO for somebody out there that may not know what PEO stands for. Yeah absolutely. So PEO is a professional employer organization. And like I said, it means that you share liability. So you effectively go under the EIN of the PEO that you're joining. And you share liability. So basically, we tie in the workers comp. We provide the workers compensation for you. And then additionally, you have access to the pool of Fortune 500 benefits, which I would say is one of the biggest perks because if you're out on the open market and let's say you're a small to midsize business, I've had a lot of my clients looking at, you know, 20% and 30% renewals.
Like, it's gotten really crazy when it comes to the benefit space. Whereas, if you join a PEO like ADP, for example, you can stabilize that cost over time because since we have such a vast PEO and vast partnerships with those providers, you can actually get a rate lock. So let's say for, you know, in past years it's been 0 to 2%. So you can guarantee in the next year I'll have a zero to 2% increase and it makes it easier to kind of account for, you know, what your spend looks like at the end of the year.
Very cool. Very cool. Thank you, Kristen. We don't want that one. Sorry. So, there may be some owners out there that are thinking about a potential sale or a partnership over the next few years. What are some of the specific payroll, HR, or compliance systems that you believe buyers most want to see already standardized and in place? And why does already having these systems early materially change the diligence process as well as the most important thing which is perceived risk. So having those systems in place I think shows essentially operational maturity right you know that if you want to scale that business immediately it's not just going to fall apart everything's in place everything's there set up correctly.
So from I think an acquirer's perspective with companies that have integrated payroll, HR is in place, benefit administration is right, documentation of that multi-state compliance which we touched on a lot. I think diligence moves faster and just gives confidence that they're buying a good product. Yeah, absolutely. Easiest way to describe it is, you know, if you're investing in your infrastructure, you are going to see a better outcome when it comes to valuation and options. Once partnership conversations start. So, as you can tell, I love a good analogy, but it's kind of like buying a house, you know, are you going to pass off a fixeruppper or are you providing a home that's move in ready?
You're going to see that number and the offer that comes your way and how many offers come your way for you to choose from. Absolutely. Lean, anything to add to that? No, they did great. I'm proud. Well, I believe that our audience today has a whole new impression about how deep and how far the reach goes for ADP on what you guys can provide and I really appreciate the time and the energy that you guys have put into this. I think it has been really valuable for our audience.
Thank you. Thank you so much for having us, for giving us the opportunity, and we're always here to help. Awesome. Awesome. And for any of you out there that may have a question for myself, for any of the three, Leon, Kristen, or Larry, just click below and let's talk. Have a great rest of your day and a great weekend. Thanks again for joining us.
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