The Partnership Promise That Most Acquirers Can't Actually Keep
Chris Reading, CEO of USPt, joins Paul to separate what acquirers promise from what they can actually deliver. Thirty-five years in the partnership model makes him worth listening to before you decide.
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. You know, over the past six months, we have had more private conversations with multi-site rehab owners about partnership opportunities with larger companies than we have had in any point of my career. Many of them are hearing very similar language from the acquirers. And yet, as we have witnessed over the years, the outcomes five years later can look dramatically different depending on who they choose. So today we are continuing in our series to and it's a very competitive limited series on this show and it's focused on the acquirers who are actively completing transactions in this market right now.
And we're going to talk directly with leaders of those companies about how their model actually works. Because at the end of the day, valuation is visible. Long-term alignment and ultimate success are not. And serious like you guys out there deserve clarity before they make one of the most important business decisions of your professional lives. So today I am joined by the one and only Chris Reading. Welcome Chris. Hey Paul, thanks for having me. So a little background on Chris, CEO and chairman of the board of directors of US physical therapy.
USPT is a publicly traded company that operates 780 outpatient physical therapy clinics across 44 states. They were the originator of the partnership model. Their headquarters are in Houston, Texas. Chris, are we ready to go? Let's do it. All right. Chris has been on many shows with us before, and I'm not putting any pressure on you, Chris, but you always come up really big in these, so let's do it here. Okay. What's the most common reason that founders have chosen to join USPT? Even when they may have had two or three other credible offers on the table.
Sure. You know, I think at the end of the day, it's about it's about a few different things. One, we try to make a personal connection with any of the founder sellers. We think that's important. We think it's important to be authentic and transparent. So, we're able to do that pretty effectively. We want people to know what life after is going to look like. And and you said it really well. You know, the price is going to be the price. And frankly, I think there probably aren't a lot of major differences there, but there are major differences in life after.
And so, we try to give our our potential partners really an inside view as to what life after is going to look like. For us, there are a few key differences. One, because we don't really have much debt, we're able to distribute cash in our partnerships every single month throughout the entirety of the course of the partnership. That's contractually guaranteed. Two, our partners have a guarantee that when they leave the partnership at a point of retirement, they can transact and they know exactly what the value is going to be.
We just update the trailing 12 month times the multiple that we paid up front and we stroke a check and so there's certainty in that. The main thing however I think is just the relative connections that we have with our long live partners because we know what it's like to be an entrepreneur inside of a company. We give these folks a lot of latitude to run their business to keep their culture. We don't cut staff. We invest in resources so that they can press on the gas and go faster and farther.
And so the relative amount of change I think is much more limited as compared to a lot of other acquirers. And I think that's important for a lot of sellers. So, Chris, what do sellers really come to appreciate about USPT, the USPT team after they've gotten to know it? Let's, you know, may maybe one to two years in, what do they really come to appreciate? I think the resources, you know, people hear about it and they say, well, you know, we have all those things. We we have human resources and we have contracting and we have an attorney if you like and we have all these things.
And yet when you're at scale and you have people that have been doing it for 20 years at a really high level really makes a difference. Sorry I've got I've got yard guys here today of course. And so the just the depth and the breadth of the support I think is a surprise. And then the other thing we hear often is that people are surprised just how nice and how caring and how easy it is to connect with people in our company. It's kind of our culture and we hear that a lot.
So if a future partner took the same business and ran it through three different acquirers, where would your model produce a meaningly different outcome five years later? I know you've touched on this a little, but what else? Yeah. Well, right out of the gate, the cash flow in the business is going to go to back to the partners. It's going to go to us and to our partner on a PR rata basis. That's a huge difference. So, you know, we talk about price, which people think of as the amount that they're going to put in the bank at the point of transaction, but beyond that, these businesses cash flow well.
We help them grow. The amount of cash that comes out of these businesses that doesn't have to go to debt service because we start these partnerships up debtree. You know, that's a huge difference. The other thing I think is just the fact that they're never going to get diluted with us. Their equity is in what they control, not in a parent, which frankly may have other issues, you know, and whether it be banking or leverage or other acquisitions that haven't done maybe what they were supposed to.
So, our partners got a much more predictable outcome, I think, than with others. And when you look at the world of private equity, because you guys do acquisitions with companies that are large enough that they could go straight to private equity. Sure. But what most sellers don't realize is that with private equity, you're not getting any distributions, right? So those partners at those lower levels, those distributions will stop. So at the end of the day, what's something that you offer your partners that most acquirers just cannot truly offer?
You know, I think probably most acquirers are there from a service perspective in a lot of different areas. We're able to do it and we've done it for 35 years at scale. Things that we can offer, you know, we've talked about we've talked about cash flow. One of the things that we really focus on and make sure it doesn't happen, you know, we talk about trying to start out and not have a lot of ripples in the pond. And what I mean by that is the partners get comfortable with whoever they're going to transact with ultimately, whether it's us or somebody else.
The staff, however, they've got to overcome the initial shock and change that happens anytime there's a transaction. We go out of our way to ensure that things are really smooth. There aren't a lot of changes. There are no people changes. And a lot of acquirers will tell you, well, the only changes we're going to make are with people in the back office. Maybe they'll insource billing and collections. It won't affect your clinical staff. And while that's true, I guess on the surface, these people have relationships with the folks that are in the back office.
They've worked together for 20 years. They see somebody leaving on a Friday with the box and tears in their eyes and they go home and tell their spouse and their spouse tells them, "You need to be looking for another job." That doesn't happen with us. We don't lose a single person in any of our transactions. So, I think that's a difference maker. We start out very stable. We're able to push off and launch and go forward. Absolutely is. And Chris, I've always described you as extremely disciplined.
You're not going to do a deal that doesn't make sense. But describe for us what are the types of situations that you intentionally avoid even though it may cost you a deal. You know, it doesn't happen, Paul, very often where we get into a deal and it doesn't get completed. You you guys know that occasionally things that interfere not with your clients but sometimes somebody comes to market without help or if they use somebody else and there isn't a really good appreciation of let's say compliance and it isn't that compliance is right or wrong or you know a shade one way or another.
It's that ultimately our goal is to do it correctly so that there are no bad effects downstream. Right? You want to do it right. You want to do it with integrity. And but if it hasn't been done right, and I'm going to use the example where it's not been done correctly, and it just has happened, it's not on purpose. There is a financial impact when you make it correct. And sometimes that's enough shock and awe and enough change from what the partner expected that it doesn't make sense anymore until that's corrected.
The only other time I think we steer clear is if a partner, how to say this, if a partner doesn't give the impression that he or she or they truly care about what happens to their staff. If we hear things like, well, so and so that you know, we paid them really well in our adback list. We're going to normalize their salary and drop it by 20 or 30 or $50,000 and you know, we haven't told them yet, but they're going to be okay and they know they've been well taken care of.
That's a red flag for me. We want people that truly care about their staff. We want this to be great for everybody. We want it to live forever and the only way to do that is to take care of people. And so those are kind of two examples where we would quietly, you know, step back. No, I can certainly see by your model, the owner you just described would not be well served by your model for sure. You know, if somebody if and I'll say it as gently as I can, but we'll be very competitive with everybody and there won't be much difference on price.
But if the last dollar is the most important thing, we may not be the right buyer because there are other things particularly at the point of transaction. And there are other things that are really important to us and people are really important and integrity is important and you know how we get done what we do is important. Absolutely. And we've gotten a very similar response on this. So I'm anxious to hear how you're going to respond. Okay. But what's that one promise that sellers commonly hear in the market that is in fact just fundamentally unrealistic once the deal closes?
Nothing will change. You know, and the irony is and we go out of our way to tell people, please don't tell your staff, nothing will change. It's like getting married and saying, "Okay, we're we just got married. Nothing will change." And you're looking over the course of time and of course things are going to change even if there wasn't a deal. Things may change next week, something may happen. You know, CMS comes out with another crazy something. Things things need to change. Not because we think they should change, but just naturally things evolve.
And we need to be careful not to promise because people rely on that and then now you've broken a promise and now you have a trust issue. So, look, I think we change a lot less than most, but we still go out of our way to make sure that people don't make that promise because they won't be able to keep it. And trust me, we give the same message to our clients. Yeah, things are going to change. Chris, if you stripped away valuation and structure, what operational or leadership capability would make an owner say this group USPT actually makes my business better?
Yeah. If you strip away valuation and structure, those are two big things. Structure particularly because there's a lot of shity and confidence in the way that we do it. But look, we offer, you know, really significant advanced training programs for their upand cominging leaders. We offer ownership skin off our back in terms of funding that ownership for new upand cominging leaders. You know, we want this practice that somebody's carefully built over a decade or sometimes several decades to live forever. And that means after they're gone.
And so there there's a lot of care and attention taken to making sure that the underpinnings of the leadership and the things that keep a business healthy are going to be there for the long term. And so we invest a lot in those kind of things. And we think it's important. And that's different than if your horizon is 3 to five years. And I'm not trying to poke at that too much, but it's just the reality. We see companies, we can tell again, PEback companies, you know, a lot of smart folks, but they're going to go to market and they begin to open and do things, open clinics at an extraordinary rate and pace in order to get normalized profit, you know, contribution out of that even before they're profitable.
But sometimes transactions don't happen. And so what we see now in the industry is you know half a dozen or more good companies who've been massively overlevered and operationally things have been done that somebody thought they weren't going to have to live with because it was going to go to the next guy and it never did. And now they're kind of stuck and it affects care. It affects everything. And so you know we are able to avoid that by having you know kind of a forever view.
Absolutely. Absolutely. So final question here Chris. Okay. When you look back on your most successful partnerships, what did those founders do that made them so successful after the transaction with USPT? Yeah, I think one of the early I mean, you know, we have we have a lot of people and you know, we've got a bell curve just like everybody. They don't everything doesn't grow to the sky. But the people that get out of the gate the fastest are able to do it because they allow their team to have as appropriate interactions with people on our staff.
They send people to our master's training program and they meet, you know, really passionate, dedicated folks who are supremely nice and automatically the stress and the fear and the anxiety of a transaction goes down. That's why it's so important, you know, to kind of build that early because then you don't lose anybody. Then you can build. If you start out and people are anxious or there's so much change or there's a lack of trust, that lack of trust happens because there isn't the opportunity to maybe to build it and to connect.
And the partners who do the best are, you know, open and honest with everybody and not in a way trying to shield people because when you when you shield folks from interacting with people on our team, makes it seem like there's a scary reason why they shouldn't. And so the most successful partners and most of our partners haven't made that mistake, but I've seen it happen and eventually we get over it and then things accelerate and the partner says, "Man, I wish I would have done this differently." So we try to coach people on the front end just to make it comfortable as early as possible.
We take people out to dinner, you know, we try to connect on a personal level and then all that, you know, anxiety melts away. Yeah. Chris, once again, you have given our listeners an enormous amount of information and I really feel like you have really shown us today why USPT is very unique and very special. It's amazing how as the first partnership company now as we've gone through, you've stayed very consistent and now you really stand out among many of the other partnership companies in a way that I think that gets you a lot of deals that's just that just aren't right for some of the other companies.
So Chris, I applaud you for that and I appreciate you once again coming on. And for all of you out there who have listened today, I know you feel the same way as I do. You've got an enormous amount of information. But if you have any questions for myself or Chris, just click below and let's talk. Thanks for joining us today. I look forward to seeing you in the very near future.
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