What Owners Don't Know Is Costing Them at Closing

So, yeah, usually we get those calls when owners start to feel capped out personally and they know they need to get to the next phase of their business life cycle. But oftentimes they don't have enough value to help transition them to the next phase, right? They're they're running a busy practice, but they're not making any money. And then that's where the conversations will usually start. So, I guess just pivoting off of that, when they, you know, we get those phone calls, Joe, and just, you know, so our listeners can hear, what are some of the lessons you're starting to talk about or starting to teach those clients, early on in the process so that they can increase their market value?

Yeah, absolutely. So, first and foremost, there is this preconceived notion that, you know, people believe that just performance is equal to readiness. Now, when we always want to take a client to market when they're coming from a point of strength, that doesn't always directly equate to the company's overall readiness to go to market. So, what I really mean by that is a lot of times groups don't fully understand what buyers are actually looking for, you know, from a systems and processes and operational perspective. You know, and just having a sense of what that market readiness means.

You know what would ultimately lead to a seamless transition or integration for a prospective acquirer and you know lead to that continued success in the company's next stage of its life cycle like you had mentioned. So one of the big things groups just also haven't seen the gap between where they are and maybe where some of these you know call them top tier companies in the country may be. So a lot of times private practice owners just don't know what they don't know. They understand operations solely as how they've been doing it over all of these years and you know maybe some tidbits that they might gather from some peer-to-peer groups but realistically there are thousands of private practices across the country.

You know they all operate fairly differently and a lot of it is gathering the best practices from a number of these that can really unlock additional value and have our clients be considered in that top tier of private practices across the space. So Josh, I think it'd be very helpful if you maybe wanted to talk about the opportunities that you do typically see in, you know, what enhances the value of a company that's, if you were to say, running well enough, but just hasn't yet been optimized.

Yeah, I would say almost all the potential clients that, you know, practice owners that call us, they have busy practices. They see a lot of patient volume every year. They're doing something all day long, right? They're putting out fires, making phone calls, sending emails. So, there's a lot of activity in the practice, but it's not a profitable practice, right? Or it's not a productive practice. And so, when we dive in and look at these, you know, kind of under the hood of these practices to say, you're busy, but what could you really do better to improve overall?

U we see we see a plethora of things. We see schedule inefficiencies. We see therapists that are not billing or coding for the care they're delivering. We see schedule model gaps. Oftentimes the practice owner is trying to run the whole company themselves and they don't have any leadership team at the clinic level or regional level or the office level to help them interact with their people more and make sure they're giving people feedback and keeping people accountable, right? There's a lack of mid-level leadership. And then oftentimes even looking at their financial statements, they're nowhere close to easy to read, easy for acquirers to digest and kind of size up a business.

So, you know, there's a lot of things that we can improve and you and I can look at a practice and see it just, you know, sticks out like a sore thumb, but I think a lot of practice owners don't see it because they're working in the practice every day, right? They just know that that's their normal and they don't know what different could look like. So, yeah, when it comes time to working with these practices and preparing them to go to market, it's really a process of, hey, we need to map out where are you today and where are you going and what are the steps it's going to take along the way to get there.

But in addition to that, there's got to be some level of objectivity, right? Did we make enough change this week to make progress this week? There's got to be accountability, right? A rhythm of, you know, maybe even daily or weekly accountability early on to make sure that practice owner is taking the right steps to get to where they need to get to. And then when they execute on it, then it's wonderful, right? Because there's EVA growth. The the practice has a growth story going to market.

The practice has a leadership team that's not afraid to look at numbers. To have a group of therapists and providers that aren't afraid to work hard and see a full schedule every day. It just makes the case for going to market that much stronger for these practice owners. Back to you, Joe. I guess again, I'll ask this question so our listeners can kind of hear some of the insight behind the scenes is when we when we work with clients and do that, right, we help them improve their practices, we help them fill their schedules, bill well for what they do, and put a leadership team in place.

You and I know that we're decreasing risks for when these clients eventually go to market, but if you could highlight a few of those risks for our listeners, you know, what kind of things are we mitigating that maybe even our clients don't even fully realize? Yeah, definitely. So, you know, really there's probably a handful of major risks and all of these do go hand in hand. So an overall lack of preparedness and the systems in place for you know that clean transaction first and foremost it may just have buyers question the sustainability of a practice.

You know if information is very easily accessible and clear and transparent and tells the story of the company and is exactly what we are showing in our transaction documents and you know just very easy to follow and it just makes sense. You know that leads to more of this sort of trustworthiness among the various acquirers that we do approach. So number one people may question sustainability and that may lead to overall limited partner options if there are groups that see it. Hey, some of these processes in place, we just don't know really what the story being told here is.

That may limit the amount of groups we, you know, that may have an interest in your practice and ultimately when there are fewer parties that can be involved in a general process, that's going to lead to less competition overall and indirectly lead to lower valuations for a possible practice. Outside of just that, you know, say you get into a diligence process with an acquirer, you have a signed letter of intent, a lot of times if, like I said, information is just not easily accessible or easy to interpret and, you know, just kind of readily available, that can lead to some additional friction in the diligence process.

Whether it is from the financial diligence or compliance diligence or operational diligence, anything under the sun, it may lead to this additional friction and diligence. And you know just as well as I do when there's that additional friction and more time spent in diligence that there is that very real and unfortunate pro possibility that a deal can get retraded. From you know maybe what acquirers were looking at before signing a letter of intent you know just scratching the surface and seeing what could be portrayed to them and they get a chance to dig you know two three layers deeper and they may uncover some items that you know quite frankly it's just not something that stands out immediately.

So those are some of the major risks that do come into play when there's a group that just really does not have that thorough preparedness before going to market. But you know on the flip side when a group really is prepared and it has those systems processes in place you know across the board they are operationally ready they are showing that operational excellence that makes them really clean enough to transact and ultimately drives that additional competition among buyers and brings more players into the field and you know as I said indirectly that should be driving premium outcomes for our clients and prospective you know, companies that do come to market.

So, back to you, Josh. How with all that being said, how big do you think really is that gap from where most companies are to where they could be? Definitely, it's bigger than most think, right? Most people look at their practice, like I said before, they feel busy, right? So, they're like, there's no way I could earn any more money. There's no way I could create any more value because I'm doing everything I can today. But it's usually not the case. Oftentimes when we come in from the outside and help our clients realize these improvements, we see anywhere from a 50% upside to maybe a 200% like 3x upside for improvement opportunity.

Just for just some sample numbers, if you have a practice that has say 300,000 of EBITDA, it's not, you know, if they have two, three, four clinics, it's nothing to get them to 450,000 of EBITDA. If they have five, six, eight clinics, it's nothing to get that 300,000 EBITDA company to over a million dollars of EBITDA. That's typical everyday improvement that we see with our clients on a regular basis. So yeah, so I think the owners of these practices really underestimate what a disciplined process of preparation can do and they probably underestimate what it looks like to have somebody kind of come in from the outside to help them behind the scenes with running their practice better.

And with those outcomes, you know, obviously there's obviously the financial, they make more money this year, their practice is worth more when they go to partner with an acquire at some point in the future. But when a practice is running well, it gives the owners a sense of confidence that maybe they haven't had for a long time and they kind of what you referred to earlier, Joe, is it gives them some optionality when they go to market. If you have a strong healthy practice, you can kind of have you can be a little bit pickier, a little bit choosier with which acquirer or partner you want to partner with.

And the opposite is true. If you don't have a well-run practice, beggars can't be choosers and you're not going to have a whole lot of control over the process. So we really, you know, obviously we want financial performance when we work with our clients, some control of the the transition process as well. So, and I guess one thing I'll add to that is one thing that we're really intentional about when we work with clients and we prepare them to go to market, we want them to know everything ahead of time, right?

They need to know the numbers. They need to know their KPIs. They need to understand the road map of how much improvement they should expect to see when they're, you know, going through the process of preparation. But then at some point, you know, obviously we hand them off to your side of the team to actually, you know, help them find the ideal partner and having that acquisition or that partnership become a reality in the market. So, I guess if you could elaborate a little bit on that, how do you how do you make that happen?

How do you go about turning that, you know, knowing my numbers inside my head to a real a reality in the market? Yeah. Yeah, absolutely. You hit you hit the nail on the head there. By the time a group comes over to us, the guessing games are over. You know, we really stand on three main pillars on the M&A side when it comes to ultimately deciding, you know, deciding a potential, you know, counterparty to do a transaction with. First and foremost, you know, any groups should understand, have a full understanding of the partner buyer landscape.

So, understanding more importantly how these buyers may behave post close. That's number one. Number two, a they should have a clear understanding of, you know, possible structures including partnership versus full exit, rollover equity opportunities, really what is, you know, understood by the second bite of the apple. And you know third and most importantly probably is just a clear understanding of overall valuation. So what I mean by that is truly what is your business worth in today's market. Now Josh as you know today's market isn't the same as it was three years ago or even 10 years ago.

But you know ultimately by the time someone is fully transitioned to M&A with us there should be very few surprises left. Honestly, that's where we start day one when we have a brand new client that says, "Hey, we want to help we want you to help us prepare us to go to market." Day one, we're talking about here's the end insight, right? Here's the goal. Here's the valuation we're shooting for. Here's here's the options you're going to have at acquires. If we do things right today and make the right changes over time, there, like you said, there shouldn't be any guessing game left at the end.

Yeah, absolutely. And as you know, an M&A process, it's a long and enduring one no matter how ready you are. However this level of preparedness definitely reduces any possible deal risk as previously mentioned but also the emotional stress that comes about a process itself and any decision fatigue that you know owners may incur during a process which that's not a matter of if it's a matter of when but it's just how do we reduce those you know the stresses and fatigues of a process. Now, you know, one of our biggest differentiator really, we optimize the company's readiness and value before we take the businesses into market.

And, you know, I truly believe that is unique. We we really do prepare them so that they are that they already understand the process before it starts. So Josh, even with all of that being said, there are still times, correct me if I'm wrong, that we do tell people not to move forward. Quick no is much better than a long prolonged maybe and then a no, right? We're we do our diligence before we even take clients on to say, are you the right client that's going to be able to mentally, emotionally, structurally with your business be ready to go to market at some point?

And and there's reasons that we tell clients, hey, we can't help you or we can't help you right now. We can maybe help you later. A lot of those, you know, reasons are dependent on the owner, right? So, we either have owners that will say, "Hey, I want you to see if you can help me sell my practice or find an acquisition for my practice, but I want to leave, you know, in 30 days, right?" And they're the only leader in the practice. And so, there's not a whole lot of leadership left after they leave.

There's not much to take to market for a partnership, you know, with an acquirer, right? We also see that the business owners will oftentimes be the person who does every single thing in the practice, right? They're the office manager. They're the marketing person. They're the leader of a clinic or clinics. They're the I mean, they do everything. They treat patients 40 hours a week and do HR and payroll on the weekends and that person wants to leave, right? Again, there's not a next level layer of leadership to fall back on.

So, again, if I buy your practice and you do it all and you leave, I just bought your treatment tables and your therap. We also see owners that have created a culture where they're not willing to change. Will sit down and say, "Hey, here's where your practice is today. Here's where your practice needs to be to have the valuation that you're looking for." And they're like, "Oh, there's no way I could ever ask my staff to see one more patient. Could never ask my staff to, you know, learn something new about billing and coding." And so, the practice owners are sometimes not willing to make the changes necessary to run their practice.

Well, there's nothing wrong with that. It's just we can't help them as much if that's the case. And I would say the last point is also just if there's no cash flow, right? But again, how we alluded to earlier, there's some practices just have a lot of volume and they're busy and they see a lot of patients. But if they don't make any money, I can start up clinics on my own. If I'm an acquirer, it's almost cheaper and easier for me to start clinics on my own than to buy a practice that's not making any money and has a lot of messiness culture that is leading to that practice not making any money.

And it makes it hard. And so, again, those are some reasons we tell practice owners no or not yet is because the business or the owner is not quite ready to do it. How about you? What's one thing if owners just understood one thing about acquirers better that they can make a better decision? What would you what would you say? Yeah, definitely. Like I mentioned a little bit before, a big part of the transition really is going to also come down to a very clear understanding of that partner landscape and how those various partners behave postclosing.

So really a point that we try to get across with our clients is you know what that right partner is and that right partner it's going to expand the business. The right partner is not going to fire your staff. If anything your staff may be repurposed but no one's going to try to fix something that isn't broken. And ultimately, you know, the right partner is going to provide those additional support services to match the needs of your practice and give you the tools to continue expanding further, you know, to continue providing opportunities for your people.

But ultimately, I think that's one big point about just the right partner itself. But the last piece also a simple formula if you want to just jot it down in your heads. Preparation plus clarity equals better outcomes. That is something we tell our clients frequently. And you know it definitely holds true today. What ties into that is getting the business ready and getting the owner ready. And those are very different processes, right? But you got to have kind of both of them executing really well and both of them ready to go.

Preparation of the business, preparation of the owner, right? Plus your clarity for the business and your clarity for the owner gives better outcomes for the business and for the owner, right? So they both matter 100%. Yeah, absolutely. So I think that about concludes it for our conversation today. So really apprec appreciate your time talking through this and you know hopefully providing a lot of value to our listeners here today. And until next time, you know, have a great day, have a great week. Thank you. Sure.