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Episode 7

An Investor's Perspective of the Therapy and Rehab Space

Serent Capital’s John Caselli joins the show to talk about the current Therapy and Rehab space and answers our investment questions. Some of what we talk about: Overall view of the T&R’s past and present 4 critical questions a practice should ask itself when looking for investment Planning a timeline to sell
Published on 06/14/2023
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Episode Transcript

Scott – Hey, good morning, good afternoon, and good evening and welcome to the Therapy Matters podcast. Your one stop resource for expert insights and advice on everything, therapy and rehab. Good to be with you again, I’m your host, Scott Rango, and today I’m joined by John Caselli with Serent Capital. John, thanks for joining the show today.

John – Thanks for having me! I couldn’t be more excited to chat with you about therapy and rehab. 

Scott – Awesome, John maybe for a little context, it would be good to do a brief introduction of yourself for the audience.

John – Sure, happy to. So quick background, I’ve been with Serent for just over ten years, and inside of Serent we are a broader health care platform. We’ve been active investors in health care since the start of the firm. I’ve had the good fortune of leading it over the last seven years.

Scott – That’s awesome. Well, I think you will, certainly, be able to give some good insight and perspective to the conversation today. As an investor in the physical therapy space and in health care in general, I’m sure you can attest there is just a ton of activity that’s happening and in health care, but particularly in the PT space. It feels like we’re hearing of acquisitions that are taking place both big and small, just on a monthly basis. We would just love your perspective overall on the market, and where it’s been, where you think it is, and perhaps where it’s going.

John – Sure! I won’t venture a guess at where it’s going because in some respects that’s a very difficult thing. I’ll chat a little bit about where we’ve been and where we are today. I think if you look at the last two or three years, it’s been the era of free money. And so the multiples and people’s willingness to really bend over backwards to use acquisitions for growth has been incredible. And they were able to do that through cheap debt. At this point, we’re really seeing, in our whole world, a return to normalcy is really what I would phrase that as. Your interest rates have risen, and so a lot of the consolidators inside of the market who have taken on debt just have less ability to keep acquiring new companies. So there’s a little bit more of a premium on quality. People are looking for really great assets and companies to partner with. And most companies are still commanding, really healthy multiples, but businesses that are not quite as high quality or even lower quality, are generally being shunned.

Scott – It’s interesting, if you were a practice, and you were really looking to have some kind of an exit. What are the questions that you would ask yourself and what are you looking for in that conversation to get started?

John – I was just sitting and reflecting on what you said and I should say, that people are still active. And so, it depends a little bit on what you want to do but, if you as a practitioner or an individual is thinking about just selling their practice, there is still a really robust, healthy market there. And so, while I say a return to normalcy, I don’t want people to fret and think that, gosh, nothing’s going to get done, but it is a tougher market than it once was. You’re asking the right question there, Scott, which is, how do you evaluate, what to do as an individual and who to partner with, which is a little bit of a question. I think there’s four fundamental questions whenever you are considering a sale of really any business but one in particular I think is incredibly important when you’re discussing a practice. The first one is, what will I make? I think it’s always that kind of question, it’s a simple one, which is, how much money am I going to make in this? Two, what’s going to happen to my patients? I think almost every practitioner I know deeply cares about the outcomes of the individuals they serve. Having a good understanding of what’s going to happen with your patients can be number two. Number three is what’s going to happen to your employees? You probably built a strong culture that’s attracted great talent. There’s people that you really care about inside of there, and having an understanding there I think is critical. Then the last question, and this is an interesting one, is what’s going to happen to me? It’s a really interesting question because depending on who’s acquiring you, there’s different outcomes for you as an individual. Those are the four key questions that I would rest on. We can dive into any of those if you’d like, but I’ll stop there.

Scott – Yeah, that makes sense. As you think about those four questions in your mind, what is the evaluation of  my patients, my employees, and then me, you probably have to also start thinking about, what kind of investor are you looking for? Are you looking for a strategic investor, to where you want to be more involved, have significant impact on you, and what that could look like, or are you straight looking for a financial investor? Where it allows you to have a little bit more ownership of what you might and where you might take the business and have more say. So again, for yourself, your patients, your employees across the board. So it sounds like as much as you ask those questions you also have to be thinking about then what’s the type of buyer or the type of investor you would want to partner with?

John – Totally! I think, with those four questions we laid out, if you can answer those four, you’ll come to an answer of what type of investor I would like to be a part of. You hit the first one on the head, which is do I want to be acquired by a larger consolidator? There’s a bunch of really good large practice chains out there that have tremendous care and that you can be a part of. That’s in many ways the simple and straightforward way, with all those different flavors of ice cream in there that you can be a part of. The second one is obviously joining with a financial sponsor. Now, what I would tell you on the ladder is that’s going to depend on scale. If you are in the 2 to 5 practice range, you’re much likely to be a better fit for someone that is consolidating a bunch of changes together. I’d say most financial sponsors when they’re looking to invest, you know, they’re going to have their own box, quote, unquote. What I mean by box, is their investment criteria. Oftentimes there are minimum revenue or minimum profitability floors that they look for. And so, as you first think about evaluating which one do you want to go with, which is you’re selling to a strategic or selling to a financial sponsor, you first have to ask yourself, am I a viable candidate for either, really? Probably first as a financial sponsor, and on that one, below 3 million in  profit, it’s pretty unlikely that someone at a finance sponsor is going to lean in. In transparency, as you get north of 5 million is where the financial sponsor route may be more viable.

Scott – So you then probably more like a roll up strategy at that point, right?

John – Yeah, I think that’s right. And which gets into the kind of questions I laid out because not all each consolidator has different things, right? They offer different opportunities. And what I would tell you is you kinda go through these, I’ll hit the ones that seem more straightforward at first, which is what will happen to my employees? The default situation is they’re gonna want to retain all of your employees. This is a business that obviously requires practitioners to provide care and almost always the expectation is, gosh, we’re not gonna be changing the people. When you get outside of the practitioner itself, if you have a multi-clinic operation and you have, for instance, a regional administrator, that may be a different question because those in these larger chains may already be centralizing a lot of things like scheduling, or a centralized call center, and so that just may be a choice they’re making. And while the staff at the clinic level is going to be very protected, when you get above that, they may or may not keep those individuals. That depends a little bit on the company. For example, if you own five clinics in Chicago and someone that has 20 clinics in Chicago is acquiring you, they’re probably not going to keep your regional administrator. But if someone in Chicago has 20 clinics and they wanna buy 10 clinics in Oklahoma, very likely they’re gonna keep the person that’s working across all 10 clinics. I share that only so that you can think a little bit about who’s acquiring me and where are they today? What does that mean for not just my clinic level staff, but also my staff that are across all the clinics? On the patient side, every one of the large players in the space is very focused today on driving great outcomes. And partly because they understand that ultimately they have better conversations with the payers is because they’re driving improved outcomes. They’re all very focused on it, and at least theoretically, if someone is really focused on outcomes, they should care very much about treating patients in a responsible and caring manner because they wanna drive referrals and they also wanna drive great outcomes.You’ll have to ultimately evaluate: “Hey, does the person acquisition do their values line up? Do they think about clinical care in the same way that I do?” This is a learning experience for me over the years. I’ve been into many clinics in my life where there may be slightly different ways in which that person is treated, but each of them gets a great outcome. You’ll have to go evaluate that and see if that’s what you’re comfortable with. But I generally view the larger players as being on the edge of figuring out what are the best practices to drive great outcomes for patients. That leaves us with two others: What does this mean to me? And what is the valuation, how much money do I make? Valuation hinges on a few different things – yes, of course, your level of profitability matters; that’s ultimately what people will look at and think about what you’re valued on. As an example, are you looking to retire as question one when you start because if you’re looking to retire, you’re ultimately looking to sell a hundred percent of your business and that will probably put a slight damper on your evaluation, right? It’s not material, but a little bit in part because if you’re not looking to retire and you’re willing to retain 20 to 30% of the stake going forward, you’re showing to the company acquiring you that you believe in this and that you’re gonna be a part of it. It also keeps you bought in and you’ve run a great clinic to this point in time. Healthcare is still a cottage business – healthcare is local and so you understand how to build a good clinic. While they want to bring some best practices from their perspective along and would like you to help implement some of them, they still know that you’ve built a great following and base and you stay around and keep 20, 30% matters. It also gets into this piece of, do you likely already take some sort of distributions in your business and be able to keep that safe? Many of these folks, not all, but some, will allow you to take distributions in accordance with your 20 to 30% ownership in the business. So while you’re still getting paid your salary, you’re also getting that distribution piece. And it may also be the case that maybe you wanna retire, but you’re also just willing to keep 20 to 30%. Maybe you have someone in your business that’s gonna step in like a number two. The other kind of factor is employment. How much is the company acquiring you, going to force fit their model onto you? Some of the larger folks have great brands that help drive a lot of referrals for them. The expectation when they acquire you is that you’re going to represent that brand. And then there’s others that are more in what they call, like a fragmented model, where they don’t own a lot of clinics, but they don’t expect you to convert, quote unquote, to the brand. So you have to work through it: “Hey, is that something I’m comfortable with?” Both of them have real pros and cons.

Scott – Yeah. And you have to think about that hard, right? Because you’re coming from, if you’ve been an owner-operator for 20 years and you give majority stake to an organization, you have to be really comfortable with what your role is within that organization moving forward. So it’s a key aspect to how you’re gonna work and live and be involved for whatever period of time you’re willing to sign up for post-transaction. 

John – Yeah, and that’s a great point. What duration of time am I willing to sign up for? And particularly if you’re rolling equity, you’ll often see a certain time commitment you have to make. And then there may even be a way to pre-plan, with the company that initially acquired you, a next exit. And so that’s just something to think about when you’re working with people. But look, these are all different factors, right? And the last one that’s more qualitative – now we’re getting to the quantitative one, which I think is an important one for everyone – is, hey, what am I gonna make here? And, in some way, this is your life work, right? And I think everyone who’s ever started a business feels this way. So on the valuation piece, what I would tell you is first the size of your business is ultimately going to impact your multiple – the larger you are, the larger the multiple ops. And then more importantly, as you go through that process you really need a great lawyer – probably number one. If you think you’re gonna get a deal done and not have a good lawyer, you’re gonna be in for a pretty painful ride because you’re gonna be negotiating things you shouldn’t have to negotiate. And I wanna define what I mean by a good lawyer, cuz I think we all know a quote unquote good lawyer. What I mean is, hey, I’ve sold north of 15 businesses that look like yours. And so it’s just like in the last year, they’ve probably sold two to three practices that look like yours. That individual then understands what is normal. And I think the second question is, do you hire a bank or not hire a bank? The pros of hiring a bank is you get to do a market check and figure out if the price you’re getting is fair. The con of it is, banks are there to optimize getting a price, but they’re not often there to optimize getting a partner. If you’re selling a hundred percent, almost always you should hire a bank. If you’re not selling a hundred percent, spending the time to actually understand who you’re gonna be working with is pretty critical. And sometimes banks don’t allow you to do that as well. But it’s a size question – the larger you are as a practice, the more likely you are to hire a bank versus the smaller, the less likely you are. Hope that gives you a little bit of color on all these.

Scott – Yeah. Hey John, I’m curious, this is not something you just decide overnight. Any guidance on how long in advance you should start thinking and planning about the process and going into a transaction? Clearly, I would think if you’re going to make a decision to, say, take some chips off the table or roll over 30-40%, there’s gotta be a lot of planning that goes into that, right? And you can set things up and structure it more appropriately. Any guidance on the timeline to do that and to think through that? 

John – Yeah, it’s a great question. And I don’t have a wonderful answer, but I’ll try to do my best. When people think about selling, I would say generally for smaller businesses, sub $5 million in profit, it’s more organic than that. It’s just hey, we’ve had folks reaching out to us and I’ve gone through the thought process to figure out that I’m ready to take some chips off the table, or I’m looking to step out of the business or bring on a partner. That’s more of a mental journey and it’ll take however long it takes. I’ve seen it take three months, I’ve seen it take five years. But once you get to the point where you know what you want, it’s relatively quick. In some respects, I bet there’s not a single person listening to this podcast that hasn’t been reached out to at some point by one of the large guys. And it’s just a matter of do I want to take that call? And I think you can reach out to three or four and run your own mini process with them, doing discovery on what each partner looks like. And if you’re really large and prepping for an exit, that often means trying to optimize profitability before the exit – probably well north of five, maybe closer to 10% of profit. That’d be done 18 months in advance, because you need to prep for six months and implement those changes for 12 so you can get credit.

Scott – So not every glove fits every hand, so to say.

John – Correct! And a little of it depends on each individual case.

Scott – John, this is a great conversation and I thank you so much for joining us today.

John – Yeah, it was my pleasure! Thank you so much for having me on here, I couldn’t be more thrilled!


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