Episode 16

Perception vs. Reality: Current Market for M&A in Rehab Therapy

Paul Martin of Martin Healthcare Advisors, joins Allison this week to give us the rundown on the current market. Is what we are hearing online what’s actually happening? Some of what we talk about: The state of mergers and acquisitions What is driving the current perception of the market How to attract buyers in today’s market
Published on 10/19/2023
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Episode Transcript

Allison: Good morning, good afternoon, and good evening. Welcome to the Therapy Matters Podcast, your one-stop resource for expert insights and advice on everything therapy and rehab. I’m your host, Alison Jones. Today, I’m joined by Paul Martin, President of Martin Healthcare Advisors. Paul, thank you for joining me today.

Paul: It’s great to be with you, Allison, and I’m glad to be here.

Allison: Paul, before we dive into today’s topic, I want to give our audience a little bit of background on who you are. So, take a minute to introduce yourself and tell us a little bit about your experience. Thanks.

Paul: Sure, I’ll be really brief, but I am a physical therapist by background. I have not treated a patient since 1993. But just very briefly, I started a practice called Physical Therapy and Sports Services in New Jersey back in 1989. Two partners joined me, and the three of us grew that practice to 21 clinics by 1996.

In 1996, we subsequently sold that practice to NovaCare, our big competitor at the time. I got to spend three years on NovaCare’s merger and acquisition team, which was a phenomenal experience. Along with the acquisitions we had done when I built our practice, it got me enthused about starting a new company for the rehabilitation industry.

In 1999, I started this company, Martin Healthcare Advisors. I always looked at it as a very boutique, but very deep into the rehab industry group, and we’ve grown our group to 12 of us altogether. We have four former physical therapist owners who are now consultants. We have three analysts. We have an investment banker that has been with me since 2007, and we now have added an ABA, Applied Behavior Analysis professional to dive into that industry as well. 

We also have the greatest executive assistant known to man in Heather Martinelli. So again, this is just a great industry to be a part of. It’s been a long, exciting ride, and I’m excited to talk about our topics for today.

Allison: In this episode, we’re going to focus on mergers and acquisition activity, and specifically, we want to address perceptions versus reality. There’s a perception that there’s less M&A activity, that multiples are down, and that the market is generally down. How accurate is that perception?

Paul: I’m going to tell you what is new and improved, but the perception is actually very accurate. The market is down from 2021 and 2022. We saw about 145 transactions in 2021 and around 125 deals in 2022. Now, 2023 started rather strong with two really large deals: Confluent acquired Motion and Ivy Rehab acquired Excel. 

In the summer, JAG Physical Therapy acquired NYPT and Wellness. Year to date through 2023, we have seen 49 transactions, and based on the businesses that we are taking into the market, multiples have definitely regressed from 2021 and 2022.

Allison: How would you describe the state of M&A?

Paul: Most people are not really aware, but the market is definitely looking to turn. Over the last four weeks, we have interviewed eight large company acquirer CEOs. Our analysts are currently working hard to recompile all these results in a Delphi analysis. We asked them very clear questions about the market and where it’s going. 

What most private business owners don’t realize is that all these acquirers are still doing deals, but they are being much more selective. Great companies, great sellers, are still getting great deals. The industry acquirers out there don’t want to scare off great deals. Just so I’m clear, a great deal can be a one-clinic company or a hundred-clinic company or anything in between. It’s all about the performance of the company and its preparation.

Allison: Can you dive a little bit more into what makes it great? You talked a bit about performance. What indicates strong performance?

Paul: Strong performance, especially in the area of metrics, financial margin performance, compliance, and alignment of leaders in the company, not just looking to an acquisition and a sale, but through it and where they’re headed as a team after they’ve been acquired and are with their new partner, versus a company whose financial information is in disarray or cannot be updated monthly basis, where operations are not at the highest industry level, and productivity is low. That’s where we’re looking at a good, solid-performing company.

Allison: So, tell me what’s driving the negative perception that’s in the market today?


Paul: That’s a great question, and I believe we hear it a lot. It’s a lot of chatter from the companies that are going into the market unprepared. Acquirers in this current market, with the cost of money, the cost of capital, the cost of debt, are no longer going to do these special case deals. They no longer have tolerance for delays in a transaction from someone who’s not prepared. Delays can occur with the lawyers dragging out the legal process because they really don’t know how the acquirers need to respond to their lenders, etc. 

The not-prepared, special case deals that used to get through, no longer are these companies doing that. So, I think you’re hearing a lot of chatter from folks who have gone into the industry unprepared, and they’re telling people that acquirers don’t want to do deals anymore. They all want to do deals.

Allison: You sort of alluded to this. Interest rates are higher than they were a few years ago, meaning that money isn’t quite as cheap as it was, so why are many companies, nevertheless, actively looking to buy physical therapy practices?

Paul: Another great question. Look, interest rates are typically driven by the 10-year treasury rate. Everybody’s focusing—private equity groups and financial folksfocus every day on where that 10-year treasury interest rate is. If you go back to 2020, the 10-year treasury interest rate was 0.5 percent as of August 2020. That is what we call free money. When money is free, we’re willing to take chances, even on deals that may not look as good, but we’re going to fix them. 

Going back to 2020, that’s when it all started to drive. For any of you that bought a house back in 2020, you know that this is not a sustainable model going forward. Economically, this is not something that can continue. So, we look at the 10-year treasury note as of August 2023, it was 4.25 percent, comparing it period to period.

Most would look at that and say it’s not all that high, but it’s nine times more than it was in 2020. For those who grew up in the eighties, like I did when my parents were buying homes, in September of 1981, the 10-year treasury was 15.62%, which would make borrowing rates for a home at 18-19%. 

This has become a hit to investors, especially those who were just getting started in 2020. But the investors in this industry, those behind the private equity groups, can still make an enormous margin and make a lot of money acquiring physical therapy practices and doing it well. 

I’m talking about this right now, but yesterday, or two days ago, the 10-year treasury was up to 4.8%. This is a little rattling for the economy right now, and most are predicting that this will start to come down at the end of 2023, and we all hope it will come down into 2024. These interest rates, unless you have a privately-held growth company that’s borrowing a lot of debt, mostly hit the acquirer side. It really doesn’t hit the performance of a physical therapy practice. It mainly affects the acquirer side.

Allison: So, there’s still a lot of activity, it’s just a little more selective in how they’re approaching it.

Paul: Exactly. Yeah, there’s still a lot of activity. In any single deal, we can have eight to 10 companies come in and make initial offers, and then we keep paring it down to the final one that gets the deal. When we’re taking companies that are those great companies, which just means they’re well prepared, it doesn’t mean they’re huge. There are still a lot of acquirers, and there are some new acquirers that are really making a splash in the most recent three months.

Allison: So, Paul, if you’re a business owner looking to sell, what should you do in this economic climate to attract buyers? What are buyers looking for?

Paul: First and foremost, you have to be prepared, and you have to really know your business. One of the best ways to get to know your business inside and out is to have a valuation performed on your practice and really try to look inside. It’s like the gears inside the watch. You want to do this from somebody in the industry who has done valuations in the industry. You really don’t want to go to an outside accountant or a bank. You really want to have an industry professional do this valuation. 

In that valuation, you’re also checking your preparedness for this market, not for the market back in 2021, not for the market at the end of 2022, but for this current market. Are your financials in a format that can be updated every month and show the real EBITDA, which is the earnings before interest, taxes, depreciation, amortization? That’s the true cashflow of your company, and that’s what acquirers are buying. 

When there are some question marks about that EBITDA and whether or not it’s real, and there are some things going into that, like a significant amount of personal expenses, or various one-time expenses that really aren’t one-time expenses, that will send an acquirer because they’ll see it as a delay-filled process, not a delay-free process. 

How do your metrics, such as visits per new patient, units per visit, cash per visit, and visits per FTE per therapist or professional, compare to industry benchmarks? Do you have solid reports to show this performance? Have you had a compliance review in the past 12 to 18 months? What we are finding over and over again, as I touched on before, is whether your leaders are aligned and if you have a plan for growth through that acquisition.

Allison: You’re going to be joining us at TherapyCon, coming up in March of next year. You’ll be presenting on a similar topic. Can you give us a preview of what you’re going to be talking about?

Paul: Absolutely. First and foremost, we’re going to have a lot more updated data, and folks will be able to look back at this and see if some of the predictions from all the CEOs that we talked about and our analysts are saying that this market is going to improve, “Will it get back to the 2021 and 2022 levels?” It may never get back there, but 2017, 2018, and 2019 were strong years for transactions. So, we’ll be updating on where we are, as it’ll be 2024. 

The title is “Maximizing Values in Turbulent Times: Merger and Acquisition and Wealth-Building Strategies for Physical Therapy Practice Owners.” That’s like a taboo. We’re clinicians. We’re not here to build wealth. But we’re going to talk about how you can utilize your practice to build strong family wealth for your future. 

We’re also going to offer actionable strategies that will enhance the bottom line, cash flow, and EBITDA, and how owners can look beyond simply managing clinical care. That’s how practices become successful operationally and financially. I’m excited to be a first-time speaker at the conference.

Allison: Yes, we’re excited to have you. If folks who are tuning in want to join us at TherapyCon, it’s going to be from March 6th to the 8th, 2024, in Las Vegas. You can find more information on the event at thetherapycon.com, so we hope you join us there. 

As we wrap up here, what are some final thoughts for folks who are listening and thinking about a potential merger or acquisition?

Paul: The idea about the market being down is correct. The perception that companies are no longer acquiring businesses, the perception that you can’t have more than one company come to your practice, multiple acquirers bidding on your practice, that’s a false perception. There are still many opportunities in this industry, and we’re not seeing that coming to an end very soon. 

If you’re thinking about taking this step or want to take in the future, start preparing right now. Have that valuation done, have that assessment done, and have someone take a close look at your practice and what you need to be prepared for in this market. It’s been great talking to you guys, and Alison, great to talk to you as well.

Allison: Thank you for joining us today. We appreciate your insights. We look forward to continuing the conversation out in Las Vegas at TherapyCon. Thank you to our audience for tuning in to the Therapy Matters podcast, your one-stop resource for expert insights and advice on everything therapy and rehab. We look forward to seeing you at the next episode. 

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