In this episode Richard Leaver leads engaging discussions with Jillian Lam, who works within Alliance Business Development, and David, Senior Vice President at Alliance Physical Therapy Partners. Discussing the landscape of M&A activity, insights on valuations, sales outlooks and future industry predictions.
Alliance Physical Therapy Partners and Agile Virtual Physical Therapy proudly present Agile&Me, a physical therapy leadership podcast devised to help emerging and experienced therapy leaders learn more about various topics relevant to outpatient therapy services.
Richard: Welcome back to Agile&Me, a Physical Therapy Leadership Podcast Series. Today, I'm going to hand the reins over to our industrious Jillian Lam, who works within Alliance and Business Development. So Jill, let me turn it over to you, whilst you can do the formal introductions and manage the podcast.
Jillian: Yes, absolutely. Thank you so much for having me. So today I know it's a different term because I'll be spearheading today's podcast, updates and changes in recent M&A activity in the PT space. We also have David, who is our Senior Vice President of Alliance Physical Therapy Partners, he's a leading expert of physical therapy and will be providing insight and outlook on the recent M&A action. And so I cannot believe it's been over a year since our last podcast on changes in the M&A landscape. So definitely excited to unravel what has gone over the past year. So David, I'm absolutely happy for you to join Richard in this rollout, with your vast experience and background and just like Richard, you're also a physical therapist yourself, you can provide a lot of insight as mentioned. So before we get started, would you like to introduce yourself?
David: Absolutely. And it's a pleasure to be here and it's been a pleasure to be with this team. First and foremost I'm a physical therapist. Just like you said, I've been a physical therapist. I'll say that Richard and I are seasoned. I'll leave it at that. So, I'm a seasoned physical therapist. But I mean, I've really enjoyed the profession and am very passionate about the field and believe very strongly in what we do professionally and also believe very strongly in what we do to try to grow physical therapy, both in terms of opening new clinics and acquiring clinics. So I've had a good bit of experience in M&A, both in physical therapy, as well as the primary care space, but I'm really happy to be back in the PT space.
Jillian: Fantastic, thank you so much, David.
Richard: And thanks, Jill. It's nice to be on the opposite side of the table for once on a podcast, but definitely David's weathered it better than me, even though we have very similar backgrounds. Obviously, David is much better looking, but obviously being an audio podcast, nobody can know that. I'm excited to talk about M&A after 12 months. Yes, very excited.
Jillian: Yeah. So to kick it off alone, we've seen drastic changes over the past several years, beginning with COVID and over this past year alone, we've been off to a slower start compared to last year, actually around this time of year of the amount of M&A transactions that have happened thus far. So to kick off, David, Richard, what has happened in the last 12 months that pertains to activity whether it's small, medium or large sized deals. David, do you want to start?
David: Sure. It's definitely to your point. It's opening up slower, but I would say also there's a degree of steadiness to it. I've had a lot of feedback from both brokers and sellers. What I'm hearing from the brokers is that what they're experiencing is a lot more activity on the consulting side than prior years, which in their world is going to then lead to activity on the other side, but just not there quite yet. I think what we're seeing in the activity in the profession right now is it's again, slow, but steady, mostly smaller deals. There's a few large ones and we can talk about them, a couple ones of size that just got completed, but I think there's a lot of headwinds to getting a lot of deals done right now, but I think the promising side again is what is what the brokers are reporting with regard to the uptick and consulting services.
Richard: I think you bring up some really good points there, and I think the last 12 months. I think obviously the number of deals is still depressed relative to recent history. Yeah. I can talk about that perhaps. But I think there's kind of two things really. I think there's still a hangover from Covid to a certain extent. And what I mean by that is people's expectations still haven't aligned with the new norm and I think that norm will change dramatically in the next couple of years as well. But different times are different, I think buyers have understood, understand very clearly. It's a very different market, but sellers are still, I think, playing catch up. And I think that that in part is a reason why perhaps M&A activity in the last 12 months is still depressed relative to recent history. The other thing is it's unsettled. And I think whenever you go through a period where it's unsettled, the market is unsettled, the political landscape, the legislative landscape, the economic landscape and within outpatient PT, generally it's unsettled. I think you get some entrenchment or lack of less activity during those periods of being unsettled. So I think that's really what's happened in the last 12 months. Buyers and sellers were expecting in the last 12 months for things to have perhaps changed already or started to improve already. But really that hasn't happened yet, not in a tangible way. And again, I'm sure we'll talk about that a little bit more with regards to what we believe will happen going forward. But I think those are the two key things that are still happening or have happened in the last 12 months.
David: Yeah I agree. And I think to circle back to something you said, just today I had a conversation, the first time I've heard this, a buyer with the expectations for the market and was willing to go back to a seller and have a conversation with a seller and say, look, you have to understand where the market is today. And so it's tough because I mean, I've been on the other end and when you're on the other end, you have this expectation and you saw this amazing activity in the market in 21, 19 before that, all this demand coming out of the pandemic and the sellers are going to have this expectation, but a lot of the things that are unsettling to use the word you used Richard, look, we have to understand that some of them might not go away. Interest rates that are high might be here for a while. So we have to, both buyers and sellers, adapt our expectations. I do think that there's optimism though, because of the fact that some of these things are becoming new norms. And I think people will adjust. And so I think there's going to be some good activity.
Jillian: I definitely have to say conversation there over the past year, we're seeing that it is the new norm moving forward. It's sellers so and adjusting, , and going with the many conversations that we've had with practice owners throughout the sales process, we've been hearing some challenges that they are facing. Do you feel like there's any specific thing that stands out on what you're hearing from practice owners through these discussions?
David: They're tired. Here's the part I love, Jill. They love physical therapy but they're tired. They're optimistic about our profession, but staffing now, and I know Richard, you can lean in by leading an organization, you see it every day. Staffing now is a bigger challenge than ever.
Richard: I think what I think about is the hamster wheel, and I think a lot of practices are on this hamster wheel and they're waiting for either the environment to change to make it easier for themselves to kind of propel themselves continue on the hamster wheel or waiting for somebody to just stop it for them. I think there is still a belief by private practice owners and you have to have positivity, otherwise it's going to be incredibly difficult to run your business. But I think a lot of sellers are waiting on the sidelines thinking, oh, it will get better. So I don't want to sell or things will change soon, but I think, I don't think that's necessarily realistic, but may ease slightly but what I think what you have to continue to do is look at it in context with the past and there is, it really is a continued trend over a longer period of time as well, reimbursement challenges, increase in administrative burden and payer issues, regulatory landscape that hasn't all happened in the last couple of years and that's not going to change. It is not going to get better any time soon, so it's an interesting time, but on the flip side I don't want to get too depressed about it, but we always still talk about the idea that physical therapy is a primary service through direct access increase in patient volumes. There's a lot of good things, but as a private practice owner there, there's still significant challenges as well.
David: Jill I think the 1 thing that I hear from you, like, what are we hearing from practice owners? The 1 thing that I'm hearing from them now, though, that I really didn't hear in prior years is their level of really understanding who they partner with. It just seems so much more important now than it did in prior years. Yeah, they would talk about who they were going to partner with, but it was more about like, what are you going to pay me? And, and today, what you hear is like, look, they want to know, how can you help me with this? How can you help me with this? How can you help me with HR? How can you solve problems for me? To Richard's point, because of that hamster wheel, there's so many problems on that hamster wheel. So I think that's interesting. And to me, it signals that there is a little bit of a mindset shift to things that really matter more than anything else. Because if we're going to do this successfully, we have to be able to alleviate the burden from practice owners.
AD BREAK: At Alliance, we believe that partnership means creating something greater than the sum of its parts. Our focus is finding physical therapy practices with a strong culture and thriving community and providing them with additional tools, resources, and expertise to take their practice to the next level. To learn more about joining our nationwide community of outpatient physical therapy practices, visit our website at AlliancePTP. com
Richard: I think the days of the medium to large size entities partnering or being acquired by the big entities, the number of medium sized entities as a proportion of total practices has gone down. That group of people I believe that most of the time wanted an exit strategy. Whereas now, particularly recently, and we, I'm sure we'll touch on this with regards to the size of practices that are partnering, it's smaller. And as you say, Jill, a lot of these people are not at retirement age. They want to truly partner and they are just tired of the grind and of the non clinical grind. So, it's a very different type of seller, I think, than it was or significantly different type of seller than it was five, ten years ago.
Jillian: Pivoting over to the deals, as we're just talking about the type of seller, what types of deals are getting done? Are there more large versus small, vice versa, specific range, what are we seeing out there?
David: Well, to Richard's earlier point, I mean, it's generally smaller deals right now, you're one clinic, two clinic, three clinic. And part of that is a function, there's just more of those available right now. I think the other piece is that there's a lot more risk in those bigger practices. And I think a lot of the buyers are going to be much more risk averse in this economy right now. I think last year there were a couple large deals that got done and there was a large deal that just occurred in the market a week ago. But again, if you look at the scope of who's tracking the deals, they're generally smaller deals and that's, that is actually consistent across a lot of healthcare platforms right now.
Richard: I think the other point to make is not only the size of the deal, but there is a change in the type of deals. What I mean by that is pretty much anything could be sold. A few years ago, a lot of dysfunctional underperforming entities were sold at a price that was probably much higher than really what it was truly valued, valued at, or should have been valued at. So I think about what's happening recently. M&A activity is, and again, this is all across healthcare is the quality of the assets, the better quality assets that are being traded or being sold. So the buyers are becoming much more disconcerting with regards to what they are buying, because the cost of money essentially has gone up and you can't afford to make mistakes because it can get you into a lot of trouble with regards to if you borrow money to pay for that entity.
Jillian: Absolutely, you're purchasing clinics and such. We also understand that not all transactions fall through to the completion of sales. So can you give some reasons why deals are not actually getting done?
David: Yeah. I mean, Richard named several, I mean, look, the cost of money is, is much higher and there's less comfort with risk on the buy side, but I think we touched on it earlier. Many practices are still wounded from the pandemic and they're wounded in a lot of ways. I can't remember the exact statistic, but it was either 11 percent or 13 percent of the workforce that just left in 2021 and they haven't come back and the schools are still running deficits. So you have practices that may have been fully staffed in 2021, 2022 now aren't. And so they're struggling on a revenue side, they don't have the consistency that a buyer wants to see, which isn't to say that these couldn't get done. But I think it goes back to what we talked about at the top of this podcast. It's on expectations where if I'm a seller, and I have expectations from, , experience of 2021 or 2019. I need to reset my expectations and understand that in 2021, outside of the 1st pandemic year, my practice might have been super consistent, but now I'm struggling filling 3 staff roles. And that's going to impact my valuation. So I think if, if those expectations align, you'd see more of those deals getting done. But I think that right now the big reasons we already mentioned.
Richard: Yeah, I think there's a number of reasons, and David's touched on a Many of those, but the perceived value, obviously, as one, there's a disconnect between buyer and seller, which essentially David has mentioned. I think the other thing is tolerance for risk on the buyer's part, which we've talked about and that tolerance for risk is associated with will the clinics be able to maintain staffing? Is it entity compliant? Are there any possible compliance issues that may result in paybacks or any type of financial hit to the business longevity of staff, can the business continue to grow or grow based on COVID and some entities still struggling to grow. Nobody wants to purchase an entity that's really static either. So there's kind of a very high level issue with regards to people's expectations as it pertains to value, but there's also very practical things that are causing deals not to occur. Alliance has looked at a number of entities in the last 12 months and unfortunately, we've had to, at varying stages, walk away because of staffing concerns in order to be able to justify, or not even justify, in order to be able to support continued operations of the entities in the long term. It is tough.
Jillian: Most certainly is, but those are all great rollouts, why they're not getting done, but that leads us to valuations, what do you see as valuations compared to now 2024, back to 2019. And then also to say, being on these types of conversations with sellers and such there has been such a focus on multiples. Can you, can you give us some insight about that?
David: Yeah, I love those conversations because I love trying to help them understand. It's more about, let me put it this way, and this might make sense for the purposes of this podcast. When we talk to an employee about joining the company, base salary is super important. But you have to consider, like we talk about this thing, total compensation, which includes benefits, which includes other things in addition to just the base salary. And I think that the challenge here with valuations is trying to wrap the sellers around this idea of the total package of what it means to partner with an entity, because there's other upsides besides just enterprise value, because guess what? They're not where they were in 2019. They're not where they were in 2021. Those were artificial spikes driven by supply and demand and other other factors. If I can go to a bank and get a huge loan at 0%. Of course, I'm going to buy everything I can and a lot of people thought that would continue in perpetuity and it hasn't. So, but I still think the valuations are solved and I'd hate to tag a number to them right now, because I think there's other factors you have to take into consideration. Look, if I have 4 clinics and they're steady and they're growing and fully staffed. I'm going to value that differently than I am for clinics that are not growing and maybe are struggling to retain staff. So there's always so many factors that go into it. I think it's safe to say it in a general way. Sense though general terms that 19 and 21 were artificial spikes. I think the market has normalized and I think it's gonna stay this way for a while.
Richard: Yeah, I concur completely. Yeah, the bottom line is it's down and it's down significantly across the board. It doesn't matter if you're a single practice, 50 practice, 500 clinic practice, the valuations are down and significantly down. And if you're on that hamster wheel as a private practice expecting the valuations to change anytime too soon so you can get off it, you're kidding yourself, these valuations, yes, as interest rates go up, there may be some upward movement, but it's not going to be, I believe, meteoric. And it's certainly not going to get back to, as David says, that kind of 2019, 2020 frothiness. That was an anomaly. That was not the norm. At some point, the owners are going to have to understand that. And I think they're beginning to the very beginning, but there's always a delay, but a lot of our time is spent trying to educate the fact that it's not as it was, if you were thinking that you were going to sell at X and 2019, you got to change your expectations because it's not going to happen.
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Jillian: So looking ahead into a crystal ball, as Richard you will say. Do you have any predictions on what to expect over the next six to twelve months in the space?
David: I think we all want to hear this from Richard.
Richard: Yeah. So I don't think much is going to happen. Okay. It's a bit like technology. You always overestimate the change in the short time and underestimate the change in the long term technology innovation. I think the M&A landscape a bit like that. And , if you look at the Q1 of 2024, it was very light. Obviously you are always going to get the odd large deal, but you kind of almost have to ignore that when you're doing it. Talking about general M&A activity it was light and you might see somewhat of a pickup in 24, but I think ultimately it's going to be a very similar type of market to 2023. I think only once the macroeconomic situation changes, IE interest rates come down, inflation pressures continue to ease where you see change. And even as the interest rate comes down, it's still going to take a period of time. Because the borrowing costs aren't going to come down overnight significantly. So if somebody is holding their breath, then you're going to have to hold it for a hell of a long time.
David: Totally agree. I can't add anything else to that.
Jillian: Well, in preparation of a physical practice when practice owners are thinking of a sale whether they're planning an exit strategy or they're wanting to continue forth with an organ with the organization, can you provide some outline of helpful points on what private practice owners should focus on.
David: Yeah, there might be a few bullet points, but I think something Richard said earlier in this podcast resonates on that any deal, there's always a buyer's going to look at, okay, what are my risks and what are my upsides? Buyers right now don't have much tolerance for risk, probably the lowest tolerance for risk at any point in time I've seen in physical therapy and in my entire career. So therefore what a seller needs to do is everything they can to minimize the appearance of any risk, have consistent practice, wild swings and visits and revenue and referrals or whatever. Buyers are going to want to see things that they can have a comfort level around that can be reproduced year after year. Be consistent. Demonstrate the ability to retain your staff. I mean, to me right now, staff retention is a premium, if a practice can retain their staff, oh wow, that's exciting. What makes it even more exciting now, can they not only retain them, but add staff. And when you see a practice that can retain and add staff, those are the ones that I think the buyers in this market are going to go after. So those levels of consistency, I think, are so important. So there's a laundry list of things I'm sure that we could tick off, but really it's whatever you can do to minimize risk and appear consistent.
Richard: Yeah. I don't think it's anything different. It's just more focused on those things. I think the other thing is if you're a single practice or a small number of practices, well, it doesn't really matter if you're a large entity as well. You've got to sort out your leases. There are deals that are being killed because the leases just don't make it a viable business. You can't be operating a Taj Mahal if you've only got two or three clinicians, okay? Your lease has to be approximately between, I would say, 10/15 percent of your revenue. And not only is it based on the total cost, but also it's based on the fact that the leases have to be written in an appropriate manner and for an appropriate period of time. So the last thing a buyer wants to do is take on a practice that has a bad lease. Either they have to continue to overpay for an extended period of time or they get thrown out after six months, 12 months. So staffing absolutely is number one, consistent revenue, growing revenue, but certainly we've had a couple of partnerships that we were very interested in falling apart because of the leases.
Jillian: Are there certain key areas when a seller should wait on wanting and moving forward with the sale of their practice?
David: Well, if I put on my seller's hat, it depends on what I want. It depends on what I want out of the cell. , so here's the challenge with waiting. And I've had this conversation many times with investment bankers, brokers and practice owners, if you're waiting, cause you think the valuations are going to be better in two years. I mean, there are absolutely no guarantees, what we're seeing right now may be the new norm for quite a while, who knows two years from now, we might have free credit again, but I think this is going to be the new norm. So waiting as a seller, you are taking just as much risk by waiting because guess what could happen if you wait. You could lose staff. Guess what could happen if you wait? Your cost of benefits could go through the roof. There could be less buyers out there that are available. So to me, it comes back to something we talked about. Jill, I know since you are on many of these calls with sellers with me, we talk about this all the time with sellers. If I'm a seller and I find the right partner, as opposed to just the highest bid, I think I can get. I don't want to wait because if I've made the decision that I want to see what's out there and I find somebody I'm comfortable with and I find somebody that is like, wow, I could grow old with this company. Then you want to take that opportunity because having done a number of these, that ultimately is when you think about what's going to have a happy seller and a happy buyer down the road, when there's a good match and when you find that right partner, I would not wait, if your desired outcome is just to get the highest price you can and ride off into the sunset, then yeah, maybe you wait, but there's no guarantee that the valuations are going to be any better.
Richard: To me, it's like trying to time the market for selling your house. We've had a long period of time of price increases in properties, but it wasn't that long ago until there was the great recession and that prices fell through. So I concur with David, but I think there's another point as well. When is the right time to sell it? If you as a private practice owner have got to the point where you're seriously thinking about partnering or exiting, I think If you then wait, I think mentally it's really tough if you've decided that you've pretty much had enough of being on your own to wait an extended period in the hope that you'll get some extra dollars, you've got to balance that risk and and financial upside with with one's own mental health, to be honest, and I think a lot of sellers we speak to that is ultimately the reason, isn't it? That, that they pick up the phone or they call us back. It's not so much. Okay. I think the price is going to be right now.
David: Yeah. I think when you've made that acknowledgement to yourself, then it's just time. It's just time and that's when it comes back to then, okay, so if it's just time, what are your expectations for the outcome? And so you find whoever can do the best to fulfill that expectation.
Richard: Let's face it, the reality is most new partners or sellers, it's a one, two practice group and the difference between, half a multiple or a one, one turn or even two turns. Yeah. isn't, isn't going to be the difference between sailing in the Caribbean in a multi million dollar yacht or sailing around in a dinghy. I am not saying it's immaterial, but it's not going to be a life changing difference.
David: Correct. But what could be life changing is for lack of better words, a partner that makes your life miserable for a few years versus a partner that you're comfortable with and a partner that you're aligned with from a culture perspective, from a treatment model perspective.
Jillian: Well said, David. Well said, Richard. So anything else before we close it up, do you both want to add?
David: I'll let Richard close it. I still believe in the profession. I think it's a great profession and look, we have our challenges and we always have, sometimes we're our own worst enemy, I think one of the things that I love about working with sellers is because you just the passion about what we do in their voices and you see it on their faces and it's a beautiful thing. So yeah, we have our challenges and we have our headwinds and M&A is really tough right now it's still a great place to be. And it's exciting to be doing M&A, even in this market. And if anything, it just makes it more interesting. It makes it more fun.
Richard: Yeah, I think when we talk about these changes, it's not necessarily good or bad. They're just changes and people struggle with change, but the last thing I would say is if you're a seller, hope is not a strategy..
Jillian: Thank you, Richard. Well, we certainly covered quite a lot today. Definitely appreciate all the wonderful and informative insight. You both provided for our listeners and looking forward to seeing what happens over the next year and meeting back again, thank you, David. And thank you, Richard.
David: Thank you.
This podcast and transcript was brought to you by Alliance Physical Therapy Partners.Want more expertise and information? Visit our website at AlliancePTP. com and follow us on social media. You can find links below in the description. As always, thank you for listening.
Podcast Transcript
Alliance Physical Therapy Partners and Agile Virtual Physical Therapy proudly present Agile&Me, a physical therapy leadership podcast devised to help emerging and experienced therapy leaders learn more about various topics relevant to outpatient therapy services.
Richard: Welcome back to Agile&Me, a Physical Therapy Leadership Podcast Series. Today, I'm going to hand the reins over to our industrious Jillian Lam, who works within Alliance and Business Development. So Jill, let me turn it over to you, whilst you can do the formal introductions and manage the podcast.
Jillian: Yes, absolutely. Thank you so much for having me. So today I know it's a different term because I'll be spearheading today's podcast, updates and changes in recent M&A activity in the PT space. We also have David, who is our Senior Vice President of Alliance Physical Therapy Partners, he's a leading expert of physical therapy and will be providing insight and outlook on the recent M&A action. And so I cannot believe it's been over a year since our last podcast on changes in the M&A landscape. So definitely excited to unravel what has gone over the past year. So David, I'm absolutely happy for you to join Richard in this rollout, with your vast experience and background and just like Richard, you're also a physical therapist yourself, you can provide a lot of insight as mentioned. So before we get started, would you like to introduce yourself?
David: Absolutely. And it's a pleasure to be here and it's been a pleasure to be with this team. First and foremost I'm a physical therapist. Just like you said, I've been a physical therapist. I'll say that Richard and I are seasoned. I'll leave it at that. So, I'm a seasoned physical therapist. But I mean, I've really enjoyed the profession and am very passionate about the field and believe very strongly in what we do professionally and also believe very strongly in what we do to try to grow physical therapy, both in terms of opening new clinics and acquiring clinics. So I've had a good bit of experience in M&A, both in physical therapy, as well as the primary care space, but I'm really happy to be back in the PT space.
Jillian: Fantastic, thank you so much, David.
Richard: And thanks, Jill. It's nice to be on the opposite side of the table for once on a podcast, but definitely David's weathered it better than me, even though we have very similar backgrounds. Obviously, David is much better looking, but obviously being an audio podcast, nobody can know that. I'm excited to talk about M&A after 12 months. Yes, very excited.
Jillian: Yeah. So to kick it off alone, we've seen drastic changes over the past several years, beginning with COVID and over this past year alone, we've been off to a slower start compared to last year, actually around this time of year of the amount of M&A transactions that have happened thus far. So to kick off, David, Richard, what has happened in the last 12 months that pertains to activity whether it's small, medium or large sized deals. David, do you want to start?
David: Sure. It's definitely to your point. It's opening up slower, but I would say also there's a degree of steadiness to it. I've had a lot of feedback from both brokers and sellers. What I'm hearing from the brokers is that what they're experiencing is a lot more activity on the consulting side than prior years, which in their world is going to then lead to activity on the other side, but just not there quite yet. I think what we're seeing in the activity in the profession right now is it's again, slow, but steady, mostly smaller deals. There's a few large ones and we can talk about them, a couple ones of size that just got completed, but I think there's a lot of headwinds to getting a lot of deals done right now, but I think the promising side again is what is what the brokers are reporting with regard to the uptick and consulting services.
Richard: I think you bring up some really good points there, and I think the last 12 months. I think obviously the number of deals is still depressed relative to recent history. Yeah. I can talk about that perhaps. But I think there's kind of two things really. I think there's still a hangover from Covid to a certain extent. And what I mean by that is people's expectations still haven't aligned with the new norm and I think that norm will change dramatically in the next couple of years as well. But different times are different, I think buyers have understood, understand very clearly. It's a very different market, but sellers are still, I think, playing catch up. And I think that that in part is a reason why perhaps M&A activity in the last 12 months is still depressed relative to recent history. The other thing is it's unsettled. And I think whenever you go through a period where it's unsettled, the market is unsettled, the political landscape, the legislative landscape, the economic landscape and within outpatient PT, generally it's unsettled. I think you get some entrenchment or lack of less activity during those periods of being unsettled. So I think that's really what's happened in the last 12 months. Buyers and sellers were expecting in the last 12 months for things to have perhaps changed already or started to improve already. But really that hasn't happened yet, not in a tangible way. And again, I'm sure we'll talk about that a little bit more with regards to what we believe will happen going forward. But I think those are the two key things that are still happening or have happened in the last 12 months.
David: Yeah I agree. And I think to circle back to something you said, just today I had a conversation, the first time I've heard this, a buyer with the expectations for the market and was willing to go back to a seller and have a conversation with a seller and say, look, you have to understand where the market is today. And so it's tough because I mean, I've been on the other end and when you're on the other end, you have this expectation and you saw this amazing activity in the market in 21, 19 before that, all this demand coming out of the pandemic and the sellers are going to have this expectation, but a lot of the things that are unsettling to use the word you used Richard, look, we have to understand that some of them might not go away. Interest rates that are high might be here for a while. So we have to, both buyers and sellers, adapt our expectations. I do think that there's optimism though, because of the fact that some of these things are becoming new norms. And I think people will adjust. And so I think there's going to be some good activity.
Jillian: I definitely have to say conversation there over the past year, we're seeing that it is the new norm moving forward. It's sellers so and adjusting, , and going with the many conversations that we've had with practice owners throughout the sales process, we've been hearing some challenges that they are facing. Do you feel like there's any specific thing that stands out on what you're hearing from practice owners through these discussions?
David: They're tired. Here's the part I love, Jill. They love physical therapy but they're tired. They're optimistic about our profession, but staffing now, and I know Richard, you can lean in by leading an organization, you see it every day. Staffing now is a bigger challenge than ever.
Richard: I think what I think about is the hamster wheel, and I think a lot of practices are on this hamster wheel and they're waiting for either the environment to change to make it easier for themselves to kind of propel themselves continue on the hamster wheel or waiting for somebody to just stop it for them. I think there is still a belief by private practice owners and you have to have positivity, otherwise it's going to be incredibly difficult to run your business. But I think a lot of sellers are waiting on the sidelines thinking, oh, it will get better. So I don't want to sell or things will change soon, but I think, I don't think that's necessarily realistic, but may ease slightly but what I think what you have to continue to do is look at it in context with the past and there is, it really is a continued trend over a longer period of time as well, reimbursement challenges, increase in administrative burden and payer issues, regulatory landscape that hasn't all happened in the last couple of years and that's not going to change. It is not going to get better any time soon, so it's an interesting time, but on the flip side I don't want to get too depressed about it, but we always still talk about the idea that physical therapy is a primary service through direct access increase in patient volumes. There's a lot of good things, but as a private practice owner there, there's still significant challenges as well.
David: Jill I think the 1 thing that I hear from you, like, what are we hearing from practice owners? The 1 thing that I'm hearing from them now, though, that I really didn't hear in prior years is their level of really understanding who they partner with. It just seems so much more important now than it did in prior years. Yeah, they would talk about who they were going to partner with, but it was more about like, what are you going to pay me? And, and today, what you hear is like, look, they want to know, how can you help me with this? How can you help me with this? How can you help me with HR? How can you solve problems for me? To Richard's point, because of that hamster wheel, there's so many problems on that hamster wheel. So I think that's interesting. And to me, it signals that there is a little bit of a mindset shift to things that really matter more than anything else. Because if we're going to do this successfully, we have to be able to alleviate the burden from practice owners.
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Richard: I think the days of the medium to large size entities partnering or being acquired by the big entities, the number of medium sized entities as a proportion of total practices has gone down. That group of people I believe that most of the time wanted an exit strategy. Whereas now, particularly recently, and we, I'm sure we'll touch on this with regards to the size of practices that are partnering, it's smaller. And as you say, Jill, a lot of these people are not at retirement age. They want to truly partner and they are just tired of the grind and of the non clinical grind. So, it's a very different type of seller, I think, than it was or significantly different type of seller than it was five, ten years ago.
Jillian: Pivoting over to the deals, as we're just talking about the type of seller, what types of deals are getting done? Are there more large versus small, vice versa, specific range, what are we seeing out there?
David: Well, to Richard's earlier point, I mean, it's generally smaller deals right now, you're one clinic, two clinic, three clinic. And part of that is a function, there's just more of those available right now. I think the other piece is that there's a lot more risk in those bigger practices. And I think a lot of the buyers are going to be much more risk averse in this economy right now. I think last year there were a couple large deals that got done and there was a large deal that just occurred in the market a week ago. But again, if you look at the scope of who's tracking the deals, they're generally smaller deals and that's, that is actually consistent across a lot of healthcare platforms right now.
Richard: I think the other point to make is not only the size of the deal, but there is a change in the type of deals. What I mean by that is pretty much anything could be sold. A few years ago, a lot of dysfunctional underperforming entities were sold at a price that was probably much higher than really what it was truly valued, valued at, or should have been valued at. So I think about what's happening recently. M&A activity is, and again, this is all across healthcare is the quality of the assets, the better quality assets that are being traded or being sold. So the buyers are becoming much more disconcerting with regards to what they are buying, because the cost of money essentially has gone up and you can't afford to make mistakes because it can get you into a lot of trouble with regards to if you borrow money to pay for that entity.
Jillian: Absolutely, you're purchasing clinics and such. We also understand that not all transactions fall through to the completion of sales. So can you give some reasons why deals are not actually getting done?
David: Yeah. I mean, Richard named several, I mean, look, the cost of money is, is much higher and there's less comfort with risk on the buy side, but I think we touched on it earlier. Many practices are still wounded from the pandemic and they're wounded in a lot of ways. I can't remember the exact statistic, but it was either 11 percent or 13 percent of the workforce that just left in 2021 and they haven't come back and the schools are still running deficits. So you have practices that may have been fully staffed in 2021, 2022 now aren't. And so they're struggling on a revenue side, they don't have the consistency that a buyer wants to see, which isn't to say that these couldn't get done. But I think it goes back to what we talked about at the top of this podcast. It's on expectations where if I'm a seller, and I have expectations from, , experience of 2021 or 2019. I need to reset my expectations and understand that in 2021, outside of the 1st pandemic year, my practice might have been super consistent, but now I'm struggling filling 3 staff roles. And that's going to impact my valuation. So I think if, if those expectations align, you'd see more of those deals getting done. But I think that right now the big reasons we already mentioned.
Richard: Yeah, I think there's a number of reasons, and David's touched on a Many of those, but the perceived value, obviously, as one, there's a disconnect between buyer and seller, which essentially David has mentioned. I think the other thing is tolerance for risk on the buyer's part, which we've talked about and that tolerance for risk is associated with will the clinics be able to maintain staffing? Is it entity compliant? Are there any possible compliance issues that may result in paybacks or any type of financial hit to the business longevity of staff, can the business continue to grow or grow based on COVID and some entities still struggling to grow. Nobody wants to purchase an entity that's really static either. So there's kind of a very high level issue with regards to people's expectations as it pertains to value, but there's also very practical things that are causing deals not to occur. Alliance has looked at a number of entities in the last 12 months and unfortunately, we've had to, at varying stages, walk away because of staffing concerns in order to be able to justify, or not even justify, in order to be able to support continued operations of the entities in the long term. It is tough.
Jillian: Most certainly is, but those are all great rollouts, why they're not getting done, but that leads us to valuations, what do you see as valuations compared to now 2024, back to 2019. And then also to say, being on these types of conversations with sellers and such there has been such a focus on multiples. Can you, can you give us some insight about that?
David: Yeah, I love those conversations because I love trying to help them understand. It's more about, let me put it this way, and this might make sense for the purposes of this podcast. When we talk to an employee about joining the company, base salary is super important. But you have to consider, like we talk about this thing, total compensation, which includes benefits, which includes other things in addition to just the base salary. And I think that the challenge here with valuations is trying to wrap the sellers around this idea of the total package of what it means to partner with an entity, because there's other upsides besides just enterprise value, because guess what? They're not where they were in 2019. They're not where they were in 2021. Those were artificial spikes driven by supply and demand and other other factors. If I can go to a bank and get a huge loan at 0%. Of course, I'm going to buy everything I can and a lot of people thought that would continue in perpetuity and it hasn't. So, but I still think the valuations are solved and I'd hate to tag a number to them right now, because I think there's other factors you have to take into consideration. Look, if I have 4 clinics and they're steady and they're growing and fully staffed. I'm going to value that differently than I am for clinics that are not growing and maybe are struggling to retain staff. So there's always so many factors that go into it. I think it's safe to say it in a general way. Sense though general terms that 19 and 21 were artificial spikes. I think the market has normalized and I think it's gonna stay this way for a while.
Richard: Yeah, I concur completely. Yeah, the bottom line is it's down and it's down significantly across the board. It doesn't matter if you're a single practice, 50 practice, 500 clinic practice, the valuations are down and significantly down. And if you're on that hamster wheel as a private practice expecting the valuations to change anytime too soon so you can get off it, you're kidding yourself, these valuations, yes, as interest rates go up, there may be some upward movement, but it's not going to be, I believe, meteoric. And it's certainly not going to get back to, as David says, that kind of 2019, 2020 frothiness. That was an anomaly. That was not the norm. At some point, the owners are going to have to understand that. And I think they're beginning to the very beginning, but there's always a delay, but a lot of our time is spent trying to educate the fact that it's not as it was, if you were thinking that you were going to sell at X and 2019, you got to change your expectations because it's not going to happen.
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Jillian: So looking ahead into a crystal ball, as Richard you will say. Do you have any predictions on what to expect over the next six to twelve months in the space?
David: I think we all want to hear this from Richard.
Richard: Yeah. So I don't think much is going to happen. Okay. It's a bit like technology. You always overestimate the change in the short time and underestimate the change in the long term technology innovation. I think the M&A landscape a bit like that. And , if you look at the Q1 of 2024, it was very light. Obviously you are always going to get the odd large deal, but you kind of almost have to ignore that when you're doing it. Talking about general M&A activity it was light and you might see somewhat of a pickup in 24, but I think ultimately it's going to be a very similar type of market to 2023. I think only once the macroeconomic situation changes, IE interest rates come down, inflation pressures continue to ease where you see change. And even as the interest rate comes down, it's still going to take a period of time. Because the borrowing costs aren't going to come down overnight significantly. So if somebody is holding their breath, then you're going to have to hold it for a hell of a long time.
David: Totally agree. I can't add anything else to that.
Jillian: Well, in preparation of a physical practice when practice owners are thinking of a sale whether they're planning an exit strategy or they're wanting to continue forth with an organ with the organization, can you provide some outline of helpful points on what private practice owners should focus on.
David: Yeah, there might be a few bullet points, but I think something Richard said earlier in this podcast resonates on that any deal, there's always a buyer's going to look at, okay, what are my risks and what are my upsides? Buyers right now don't have much tolerance for risk, probably the lowest tolerance for risk at any point in time I've seen in physical therapy and in my entire career. So therefore what a seller needs to do is everything they can to minimize the appearance of any risk, have consistent practice, wild swings and visits and revenue and referrals or whatever. Buyers are going to want to see things that they can have a comfort level around that can be reproduced year after year. Be consistent. Demonstrate the ability to retain your staff. I mean, to me right now, staff retention is a premium, if a practice can retain their staff, oh wow, that's exciting. What makes it even more exciting now, can they not only retain them, but add staff. And when you see a practice that can retain and add staff, those are the ones that I think the buyers in this market are going to go after. So those levels of consistency, I think, are so important. So there's a laundry list of things I'm sure that we could tick off, but really it's whatever you can do to minimize risk and appear consistent.
Richard: Yeah. I don't think it's anything different. It's just more focused on those things. I think the other thing is if you're a single practice or a small number of practices, well, it doesn't really matter if you're a large entity as well. You've got to sort out your leases. There are deals that are being killed because the leases just don't make it a viable business. You can't be operating a Taj Mahal if you've only got two or three clinicians, okay? Your lease has to be approximately between, I would say, 10/15 percent of your revenue. And not only is it based on the total cost, but also it's based on the fact that the leases have to be written in an appropriate manner and for an appropriate period of time. So the last thing a buyer wants to do is take on a practice that has a bad lease. Either they have to continue to overpay for an extended period of time or they get thrown out after six months, 12 months. So staffing absolutely is number one, consistent revenue, growing revenue, but certainly we've had a couple of partnerships that we were very interested in falling apart because of the leases.
Jillian: Are there certain key areas when a seller should wait on wanting and moving forward with the sale of their practice?
David: Well, if I put on my seller's hat, it depends on what I want. It depends on what I want out of the cell. , so here's the challenge with waiting. And I've had this conversation many times with investment bankers, brokers and practice owners, if you're waiting, cause you think the valuations are going to be better in two years. I mean, there are absolutely no guarantees, what we're seeing right now may be the new norm for quite a while, who knows two years from now, we might have free credit again, but I think this is going to be the new norm. So waiting as a seller, you are taking just as much risk by waiting because guess what could happen if you wait. You could lose staff. Guess what could happen if you wait? Your cost of benefits could go through the roof. There could be less buyers out there that are available. So to me, it comes back to something we talked about. Jill, I know since you are on many of these calls with sellers with me, we talk about this all the time with sellers. If I'm a seller and I find the right partner, as opposed to just the highest bid, I think I can get. I don't want to wait because if I've made the decision that I want to see what's out there and I find somebody I'm comfortable with and I find somebody that is like, wow, I could grow old with this company. Then you want to take that opportunity because having done a number of these, that ultimately is when you think about what's going to have a happy seller and a happy buyer down the road, when there's a good match and when you find that right partner, I would not wait, if your desired outcome is just to get the highest price you can and ride off into the sunset, then yeah, maybe you wait, but there's no guarantee that the valuations are going to be any better.
Richard: To me, it's like trying to time the market for selling your house. We've had a long period of time of price increases in properties, but it wasn't that long ago until there was the great recession and that prices fell through. So I concur with David, but I think there's another point as well. When is the right time to sell it? If you as a private practice owner have got to the point where you're seriously thinking about partnering or exiting, I think If you then wait, I think mentally it's really tough if you've decided that you've pretty much had enough of being on your own to wait an extended period in the hope that you'll get some extra dollars, you've got to balance that risk and and financial upside with with one's own mental health, to be honest, and I think a lot of sellers we speak to that is ultimately the reason, isn't it? That, that they pick up the phone or they call us back. It's not so much. Okay. I think the price is going to be right now.
David: Yeah. I think when you've made that acknowledgement to yourself, then it's just time. It's just time and that's when it comes back to then, okay, so if it's just time, what are your expectations for the outcome? And so you find whoever can do the best to fulfill that expectation.
Richard: Let's face it, the reality is most new partners or sellers, it's a one, two practice group and the difference between, half a multiple or a one, one turn or even two turns. Yeah. isn't, isn't going to be the difference between sailing in the Caribbean in a multi million dollar yacht or sailing around in a dinghy. I am not saying it's immaterial, but it's not going to be a life changing difference.
David: Correct. But what could be life changing is for lack of better words, a partner that makes your life miserable for a few years versus a partner that you're comfortable with and a partner that you're aligned with from a culture perspective, from a treatment model perspective.
Jillian: Well said, David. Well said, Richard. So anything else before we close it up, do you both want to add?
David: I'll let Richard close it. I still believe in the profession. I think it's a great profession and look, we have our challenges and we always have, sometimes we're our own worst enemy, I think one of the things that I love about working with sellers is because you just the passion about what we do in their voices and you see it on their faces and it's a beautiful thing. So yeah, we have our challenges and we have our headwinds and M&A is really tough right now it's still a great place to be. And it's exciting to be doing M&A, even in this market. And if anything, it just makes it more interesting. It makes it more fun.
Richard: Yeah, I think when we talk about these changes, it's not necessarily good or bad. They're just changes and people struggle with change, but the last thing I would say is if you're a seller, hope is not a strategy..
Jillian: Thank you, Richard. Well, we certainly covered quite a lot today. Definitely appreciate all the wonderful and informative insight. You both provided for our listeners and looking forward to seeing what happens over the next year and meeting back again, thank you, David. And thank you, Richard.
David: Thank you.
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