In this episode of Agile and Me, Richard Leaver shares a conversation with Paul Martin about the process of selling your practice, from the necessary steps to take before putting your practice on the market to potential pitfalls to watch out for during negotiations. Tune in to learn a few tips and tricks that could help your practice earn a little more money!
[00:19] AD: Alliance Physical Therapy Partners and Agile Virtual Care proudly present Agile and Me, a Physical Therapy Leadership Podcast series. A podcast device to help emerging and experienced therapy leaders learn more about various topics relevant to outpatient therapy services.
[00:45] Richard : Welcome back to Agile and Me a PT Leadership Podcast Series. Today I'm really excited to welcome Paul Martin. Paul is very well known within the outpatient PT industry, an expert in his field, and I'm really excited to talk to Paul today about buying and selling clinics and primarily, probably selling, but I'm sure there'll be plenty of information about buying them as well. So welcome Paul, really excited to chat with you.
[01:14] Paul: Thanks, Richard. Yeah, great to be here and I appreciate you asking me to come on today.
[01:20] Richard : Now you probably need no introduction, but just in case listeners don't know who you are and your company, Martin Healthcare Advisors, please love an introduction, perhaps.
[01:35] Paul: Sure, yes Physical therapy as a background, I am a physical therapist. I have assorted Martin Healthcare Advisors back in 1999 and we do preparatory consulting, meaning preparing companies for the merger and acquisition market. And then we take companies through a full process, through to a closing.
[02:01] Richard : And you've got quite a number under your belt, is that right? I'm looking at your website, there's quite a list, do you keep a tally?
[02:09] Paul: We do, yes. And we keep in very good contact with our former clients who have now sold their businesses to acquiring companies out there in the industry. We've done dinners and we keep in really good contact with so those aren't just tombstones, those are people behind those tombstones and we keep in good contact with them.
[02:31] Richard : It's true. Well, I've yet to get to win those dinners, but that's one day.
[02:35] Paul: We'd love it.
[02:37] Richard : First off, what actually is the role of a sell side MMA broker? There's basically buy side and sell side, isn't there? Essentially, and there are differences and I think you are primarily or purely sell side, is that correct?
[02:56] Paul: Yes, 99% of the work we do is on the sell side.
[03:02] Richard : What exactly is a sell side? M and a broker, would you say? I know you could probably talk all day about that, but how would you describe it?
[03:11] Paul: Yeah, we believe that our role is to add value to a company by fully preparing that company and then guiding that client through a complete professional merger and acquisition process, really all the way up and through to a closing. And our goal is we want everyone that we work with to get an enormous return for their investment. And we keep that very close to our hearts because we think that's absolutely critical. And we actually prefer Advisor versus broker. Very commonly in this day’s world we can be termed as brokers, but boy, as Richard, these are very complicated high level deals. We prefer advisor over broker. But you can call me whatever you want. It's your show.
[04:08] Richard : I think that's a really good point, because when I was being working through processes in the past, definitely I was wanting that advice because it is an alien process, treating a patient with a routine. But it's not very often you actually sell a business or even buy a business. So you truly do need that advisory role. Anyone can be a broker, per se, I think, with regards to that's, just the mechanics of the documentation, almost. But I love the fact that you kind of differentiate between advising and brokering.
[04:51] Paul: Yeah. And you couldn't have said that any better. So thank you.
[04:55] Richard : Now, the other thing is, it is a complicated process. There are a huge number of steps, and those steps have to occur in a certain sequence. And it's very easy to miss steps which creates problems down the road or may even scupper a true partnership or selling the event down the road. So can you just tell the listeners, perhaps at a high level how that process looks and your role as that advisor within that process?
[05:33] Paul: Sure. So, first, there has to be an assessment. And we believe that that assessment should answer questions that most rehab business owners who are looking to, at some point in time, sell their company, that they have about this process and about what they can expect. First is what is the value of the business in today's current market? Secondly, they want to understand opportunities for improved value in their business, either in the short term term or potentially in the medium or long term. How can they add value to their business? And then to assist them to create a very specific list of criteria for what would be the best acquirer for that specific individual. And we find that many business owners kind of go into and start talking to acquirers without that list of criteria by which they will evaluate these acquirers when it becomes a beauty pageant, they think they become buyers, tell them how beautiful they are, and they become the one. But they really need to keep that criteria list very close to their process.
[06:55] Richard : We'll continue the conversation after a short break.
[06:57] AD: Music break and Advertisetment at alliance we believe that partnership means creating something that is greater than the sum of its hearts. Our focus is finding physical therapy practices who are already doing good things with the resources and knowledge they have and then providing them the additional tools, resources and expertise to bring them from good to great. To learn more about joining our nationwide community of physical therapy practices while maintaining your brand and clinical practice, visit our website at allianceptp.com
[07:30] Richard : Welcome back to Agile Me, a physical therapy podcast series. If I can just kind of interject a little bit.
[07:37] Paul: Sure.
[07:38] Richard : It's interesting because I believe it's really never too early to engage an advisor in in whatever capacity, because if you leave it until, as a clinic owner. I think if you leave it until the last minute, I think you are losing a lot of opportunity and creating a lot more anxiety and stress and more likely to perhaps have a poor outcome because there isn't the alignment by a seller or truly understanding what the seller really needs and wants. So I think, correct me if I'm wrong, I would imagine that you want to probably engage with the seller long before the really starting the formal process or the deal process per se. Correct?
[08:32] Paul: Absolutely. And I think that does make us unique. There are very few companies that can bring the operational acumen to a physical therapy company. So really that is the first step in our process is to assist in driving that additional value. Richard, sometimes we can double, triple and even have quadrupled the value of these companies by pulling on the right levers. The other steps to this is we want to prepare a list of potential acquirers and that should be based on geography as well as that criteria list that the seller has created. We prepare what we call a confidential information memorandum. That's a quick read book that a CEO of one of these acquiring companies could read in about 15 to 30 minutes that will lead and acquire very quickly to value. We want to maintain 100% confidential process. That is absolutely imperative. And we think the gold in this process is when you have the opportunity to then introduce the seller to the management team of the acquirers in what we call management meetings. And those are acquirers that have submitted an indication of interest and have met most of the criteria. So they're already qualified and they've already met a certain level on that initial offer. And we're working towards executing a letter of intent with the one best acquirer who is in most cases given the best offer and that can have many facets to it and then finally support and manage the due diligence and legal phase all the way through to a closing. Those are the major steps of this process.
[10:28] Richard : Yes. That's great. And I love the emphasis on the criteria best criteria because I don't believe there are necessarily good and bad acquiring entities or buyers per se. They're just different. And each entity alliance is an example of many where we have a certain culture, a certain structure and it's not for everyone. And I think an advisor like yourself is very valuable because you can filter out those entities, those potential partnering entities, to focus on those that you believe would be a fit. Obviously financially you want a certain outcome as well. But I believe buyers, sellers also want to make sure that their legacy is upheld and they feel valued and important entity and depending on who the buyer is, that could be different.
[11:35] Paul: Yeah, you hit on a couple of really huge things there. One is that, yes, every acquirer truly is different and we really believe that the only way to truly get the best understanding possible of that culture is to sit face to face with those who are making the major decisions in a company. You hit on just a huge topic there and I think that's a big part of what we believe can guide and help for companies to make the right match. And there is a match out there, the perfect match. Perfection has only happened once and so no acquirers out there saying they're the perfect match, but as you said, the closest that you can get to that the best opportunity for that seller to have success in the future.
[12:33] Richard : I kind of jokingly talk about it's a bit like dating, speed dating or finding your future wife and if you can establish certain criteria going to the process, it creates a lot less pain and hopefully no default stay on the end of the road. But yeah, funny.
[12:50] Paul: Well, maybe that's my calling in my next business.
[12:53] Richard : You heard it here first on this.
[12:54] Paul: There you go.
[12:55] Richard : This is perhaps a little unfair, but what are perhaps the three key things you would say sellers should consider to help prepare themselves? Because I think there really needs to be a considerable amount of time and focus before they even start the formal process. So how can people best prepare themselves and how can you perhaps help them that way?
[13:20] Paul: Sure, first is making sure that they are operating at a very high level of performance. And many companies believe when you talk about performance it means financial. But I think it starts with clinical that bleeds to operational and then that finally bleeds to financial. So financial is the last outcome that you get when you're strong clinically and you're strong operationally. And I would tell you that nine out of ten companies that we do what we call that outside assessment with are not operating at even 50% of their optimum performance. And that can be a number of different levers to pull to get them there. But it's very uncommon to see companies that are operating at 100% as private equity, especially now. One of the biggest changes that we are seeing is that it's harder for private equity and for acquirers to get their money. Now the bond markets are getting more difficult, the price of debt has gone way up. So these companies are very, very on edge to buy a company if the compliance is not very strong because that's where they believe their biggest risk is. So a strong compliance and a legitimate compliance program I think right now is also critical.
[14:58] Richard : Absolutely. As a buyer I'm happy to pay more for a business if I know it's operated well and fiscally responsible and generating EBITDA. So I think there may be perhaps a misperception and correct me if I'm wrong, but the idea that we're trying to find those entities that perhaps we can polish and we can turn around or get optimized. I would rather look a partner with an entity or buy an entity that is already optimized. And yes, I know I've got to pay more for it up front, but from a risk perspective, it's much less risk for me. So I love the fact that as an advisor, you go in and you get the owners to pull the necessary levers, which benefits them financially, but also benefits the buyer.
[16:00] Paul: Yeah.
[16:03] Richard : We'll continue the conversation after a short.
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[16:47] Richard : Welcome back to Agile Me, a physical therapy leadership podcast.
[16:51] Paul: Here's? Private practice section. We said one of the biggest changes that we were seeing in 2022, that has really kind of gone into 2023, is that acquirers want to move with speed and accuracy. And when you have to dig through and try to determine what are all the upsides that we can get from this opportunity that doesn't move with speed. And so we find the same thing. Acquirers are willing to pay more if the business is operating in high levels of performance as well as a good, solid, strong compliance program.
[17:30] Richard : Absolutely. And compliance is critical. I talk about providing compliant, quality care in a fiscally responsible manner, which really mirrors the kind of the order in which you discussed earlier. And if there isn't compliance, or if the compliance isn't strong enough, that's a deal killer straight away.
[17:50] Paul: Absolutely.
[17:51] Richard : Regardless of what your supposed EBITDA is, real or not real, it doesn't matter.
[17:58] Paul: No question, no question. I think the third key thing that would help to help sellers prepare, and this is often overlooked, is having management alignment and making sure that at that high level of management, that alignment and that everyone is on board with what they must receive from the transaction in order to continue to grow and thrive. Do we really know what we need and when we get that? Are we aligned then? Because as Richard, a lot of what these companies are getting are not just on the front end of a deal, but also on the back end of the deal. So they should be looking to and through the acquisition as to what are we going to do now that we have support in area A, area B, area F, and are we aligned with that? Many times we have worked with companies that have been a due diligence process has started and the acquiring company has just said we're out because there's no alignment here. Everybody wants to go in a different direction and we're not feeling that there is strong alignment and that'll make any acquirer run for the hills.
[19:19] Richard : Absolutely. Again, as a buyer the value is based on that alignment in large part and if there is a likelihood of misalignment or malalignment, then risk level goes up. And obviously as risk goes up, then our ability to pay a premium or what we believe is the appropriate price becomes less likely. So yes, I love that alignment issue. Yes, price is a key factor, but that alignment and again, establishing that criteria in the beginning and discussing that very early on to create that alignment is critical, isn't it?
[19:58] Paul: For sure.
[20:00] Richard : Now, there are always surprises out there with the process, there's always something that happens and I'm sure that you've seen it all with the experience that you've had over the last kind of 20 years. What are perhaps some of the typical surprises that sellers experience when going through the end of the process?
[20:21] Paul: I think the first one is one that is really a positive surprise. And that is because I think many folks out there, their peers have misinformed them over the years regarding the culture of the acquirers, as though they really know the culture of the acquirers because they have a clinic up. The street and a patient came to them and said they don't give good care. So the culture of that entire company must be terrible. And we know that's not the case. And I think what the large majority of our clients find is that in most cases the culture is far better and the folks at the top care way more than they had ever expected.
[21:12] Richard : Yeah, that's incredibly interesting. I agree. I think there's a perception, I don't think necessarily PT schools help, but perhaps that's being unfair, but there is a perception that big is bad and that's nowhere near the truth, is it? I think in many ways you have to be as a larger organization, I think you have to try even harder. So it's funny you raised that. And when I worked for a pirate company, one of the larger entities, the KPIs that we are operating under are actually no more than a lot of smaller entities, even though they were perceived as the kind of the churn type of patient churn. It's funny perception reality, isn't it?
[22:00] Paul: Absolutely, absolutely. When you mentioned this earlier, but I think it's worth saying again is that another surprise is owners are surprised at how different each acquirer is from a cultural perspective as well as from the deal structures that they offer. Each and every company has a very unique culture and a very unique deal structure that they have kind of embedded and have worked with over the years.
[22:31] Richard : Yes, I think the idea of deferred payment to a certain percentage of value, I won't say surprise, but certainly as a surprise for a number of buyers, isn't it? Really? I think they just assume assume that at time of selling their entity, they're just going to get one check and they bank it and that's it. But there's definitely an ongoing commitment, be that in escrow or be that payout at a later date. Correct?
[23:12] Paul: Correct. Yeah. And I think that that's something that really has to be very carefully explained and walked through with the seller because again, it's kind of the land of nowhere. Where is this equity that I have? Where is it going? How does it get paid back? Is it set in stone? How it gets paid back? The multiple it gets paid back? Do I get paid when they get paid? So there's all sorts of different options that come up with that equity, but in some of these transactions, that could be 20 to 30 to even 35, 40% of the deal. So it's important. I think the last big surprise that we see is sellers are very surprised at the level of detail that is being requested in the financial due diligence and how important it is that they have actually done that EBITDA and those adjustments properly because that goes straight to value. And we have so many folks coming to us saying, we did this ourselves, we got into due diligence and the acquirer really dug into those EBITDA adjustments and now I'm only getting three quarters of what I expected. So we walked away and that that's just a waste of time, a waste of money, a waste of energy. And again, most sellers out there have been misinformed, unfortunately, by their peers or by somebody at a cocktail party. That said, everything should be adjusted. You should be able to take all your billing collections and just adjust all that. Come on. So I think that's another big surprise to a lot of sellers.
[24:58] Richard : Yes, buyers are pretty sophisticated. We spend a lot of money and time and resource truly looking at the business under the hood. I'm sure if we could probably get an endoscopy, we probably asked for that as well. We look and as a buyer, we're not looking to nickel and die, we're not looking to lower the price to our advantage. We're just looking at it to truly come up with what is it truly worth valued. So it's not a game of, well, we're going to try our luck and try and reduce the EBITDA and say that expense y should have been applied or z. So I think sometimes I feel that as a seller and if you're not advised carefully, they almost take it somewhat personally and then when the buyer comes back and says, well, actually, this is what we're prepared to pay based on adjusted EBITDA, sure. We'll continue the conversation after a short music break.
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[26:57] Richard : Welcome back to Agile and Me, a physical therapy leadership podcast.
[27:01] Paul: Sure, yeah, and somebody somewhere told them they should get that and unfortunately it's not something that anybody's ever going to give to them.
[27:11] Richard : If we shift a little bit because we talked about sellers, but as a buyer, what does a buyer really need to understand better about sellers? Because I think there's definitely this mismatch, isn't there? Sellers think that they always oftentimes think their practice is worth more. But what do buyers get wrong? How can you help buyers?
[27:36] Paul: Yeah, I think that first of all, to have an understanding that most sellers are in competition also for the best buyer. So the sellers are actually in a competition out there because the buyers aren't going to buy every company and the best buyers certainly aren't going to buy every company. So anybody can just find a buyer who will do a deal more than likely, but how many of them are actually finding the best buyer? And I think also from a buyer's perspective to realize that what a professional competitive process will do is it will result in matching the best acquirer with the best seller for that acquirer. And what we try to do for acquirers is put them on a very fair playing field to try to communicate very clearly timing on certain things that we're going to do within the stages of a process. And that as a seller, the longer they stay in the market, the more chance they have of a breach of some sort of confidentiality. So it has to move at a certain pace and at times buyers are not ready to stay up with that pace. So they may get left behind, but more than likely they probably weren't the best buyer for that specific deal and hopefully they'll be ready on the next one.
[29:10] Richard : Yeah, I'm curious to kind of get your perspective on what tends to slow down the process. So the sellers decided to sell, they've been advised they've got their valuation up, hopefully after being, after coaching and a little bit of time. But as you mentioned, the processes can be very significant on length. But what do you find is commonly the barriers to a normal time frame? What tends to send things off the rails or slows the process down?
[29:50] Paul: The biggest barrier that we see on timing on the process is the legal face and depending upon the background of the lawyer that the seller utilizes, can make an enormous difference to that seller on whether or not that attorney really knows what can and should be protected in a physical therapy deal. What is most important, and that really is married by some of the acquirers have gotten to a point where they can't just use one attorney or even one group anymore. So they have a number of different attorneys that they may sort of farm these deals out to. And so there are times when there's kind of an education process to whether it's the buyer or certainly to the seller attorney. And that's what can really make things move at a snail's pace. And our message to our sellers is know that there's a leaderboard that these acquirers are working on and as soon as they sense that there's an attorney on the other side that just doesn't really get how these deals work, they're going to go to the bottom of that board. They're going to go to the bottom of that list. I think that's one of the big.
[31:22] Richard : Things that's funny because I firmly believe many lawyers destroyed a good deal. I went through Diligence last year and on one call there were 16 lawyers on just one side of the table. I thought, wow, how do we ever get not only the cost associated with the telephone call, but how do we ever get anything done? So I have great empathy when it comes to lawyers. Hopefully there aren't too many lawyers listening.
[31:53] Paul: No. And I'll tell you what, Richard, there are a few attorneys in the country who have done a lot of representation of physical therapy business owners, and we've also worked in deals where they want to use someone locally. And if someone locally has healthcare, typically services healthcare experience, it can go fairly smooth. But I cannot tell you in one instance, one time somebody has called us and said, we have a legal problem here. Something went wrong. We've never seen it. We've never seen it. Yet sometimes some of these attorneys will bark up a tree and they're obviously running up lots and lots of dollars because they're paid by the hour and they're just killing a deal for a seller because the buyers have other options. So it's unfortunate.
[32:53] Richard : Well, I share your either cynicism or realism. Let's leave it at realism.
[32:58] Paul: Yeah, for sure.
[33:00] Richard : What final words of wisdom perhaps, or thoughts do you have for the audience as it pertains to kind of being a sell side advisor or the process generally?
[33:12] Paul: Yeah, you were so eloquent with that, Richard. Sell side advisor. I mean, that was off.
[33:18] Richard : One thing I've learnt today look, this.
[33:22] Paul: Is going to sound pretty harsh, but I promise you this, doing this yourself is like trying to do your own hernia surgery. It's going to hurt. And not that you may not ever get it to the end, but at some point in time I really strongly believe that this is a very complicated process and to get to the best match, you really should have somebody that understands this industry help and guide you. And my other word of wisdom is that utilize an advisor that knows the business and has the ability to improve your value. Now that speaks certainly to what we do. But as I look back over the last 60 companies, 60 companies that we have done assessments on overall running at about a 40% of optimum performance. So there is an enormous amount of value being left on the table when these companies do not find someone to bring in to help them improve that performance before they go into the market. We are seeing changes in this market right now, dramatic changes, where again acquirers are discussing with us how difficult it is to get their capital, how difficult it is due to the increase in rates. They talk about all that dry powder out there, but that doesn't necessarily turn into deals that are going to be paying the kind of multiples that have been paid in the past. But how do you get the same value? Well, if you're going to get a little bit lower multiple but you can increase that EBITDA, you're going to get the exact same value. And if you can lower your risk, you might even push up that multiple that you would have gotten in 2022 anyway because your risk is lowered. So that's my final word of wisdom is again, find someone that can help you improve your business so that you're going out very clean as well as with high levels of performance.
[35:44] Richard : I think that's great.
[35:45] Paul: Thank you.
[35:46] Richard : Paul, if people want to listening and they're thinking of selling their practice, how would they reach out to you and your team?
[35:53] Paul: Absolutely, you can go to our website and basically put your name and number in there or email in there and we'll reach out to set up a call or send me an email. It's very simple. that's for Paul Martin, at the name of the company martinhealthcareadvisors.com and happy to talk, I love talking to rehab business owners.
[36:17] Richard : Thank you so much for your time today, I really appreciate it and I hear busy men and thanks for your wisdom.
[36:23] Paul: Thank you as well, Richard. Great talking to you today.
[36:26] AD: This podcast was brought to you by Alliance Physical Therapy Partners in Agile Virtual Care. For more information, please visit our website allianceptp.com and agilevirtualcare.com. Be sure to follow us on social media and LinkedIn where you can learn more about Alliance Physical Therapy Partners and Agile Virtual Care.
Podcast Transcript
[00:19] AD: Alliance Physical Therapy Partners and Agile Virtual Care proudly present Agile and Me, a Physical Therapy Leadership Podcast series. A podcast device to help emerging and experienced therapy leaders learn more about various topics relevant to outpatient therapy services.
[00:45] Richard : Welcome back to Agile and Me a PT Leadership Podcast Series. Today I'm really excited to welcome Paul Martin. Paul is very well known within the outpatient PT industry, an expert in his field, and I'm really excited to talk to Paul today about buying and selling clinics and primarily, probably selling, but I'm sure there'll be plenty of information about buying them as well. So welcome Paul, really excited to chat with you.
[01:14] Paul: Thanks, Richard. Yeah, great to be here and I appreciate you asking me to come on today.
[01:20] Richard : Now you probably need no introduction, but just in case listeners don't know who you are and your company, Martin Healthcare Advisors, please love an introduction, perhaps.
[01:35] Paul: Sure, yes Physical therapy as a background, I am a physical therapist. I have assorted Martin Healthcare Advisors back in 1999 and we do preparatory consulting, meaning preparing companies for the merger and acquisition market. And then we take companies through a full process, through to a closing.
[02:01] Richard : And you've got quite a number under your belt, is that right? I'm looking at your website, there's quite a list, do you keep a tally?
[02:09] Paul: We do, yes. And we keep in very good contact with our former clients who have now sold their businesses to acquiring companies out there in the industry. We've done dinners and we keep in really good contact with so those aren't just tombstones, those are people behind those tombstones and we keep in good contact with them.
[02:31] Richard : It's true. Well, I've yet to get to win those dinners, but that's one day.
[02:35] Paul: We'd love it.
[02:37] Richard : First off, what actually is the role of a sell side MMA broker? There's basically buy side and sell side, isn't there? Essentially, and there are differences and I think you are primarily or purely sell side, is that correct?
[02:56] Paul: Yes, 99% of the work we do is on the sell side.
[03:02] Richard : What exactly is a sell side? M and a broker, would you say? I know you could probably talk all day about that, but how would you describe it?
[03:11] Paul: Yeah, we believe that our role is to add value to a company by fully preparing that company and then guiding that client through a complete professional merger and acquisition process, really all the way up and through to a closing. And our goal is we want everyone that we work with to get an enormous return for their investment. And we keep that very close to our hearts because we think that's absolutely critical. And we actually prefer Advisor versus broker. Very commonly in this day’s world we can be termed as brokers, but boy, as Richard, these are very complicated high level deals. We prefer advisor over broker. But you can call me whatever you want. It's your show.
[04:08] Richard : I think that's a really good point, because when I was being working through processes in the past, definitely I was wanting that advice because it is an alien process, treating a patient with a routine. But it's not very often you actually sell a business or even buy a business. So you truly do need that advisory role. Anyone can be a broker, per se, I think, with regards to that's, just the mechanics of the documentation, almost. But I love the fact that you kind of differentiate between advising and brokering.
[04:51] Paul: Yeah. And you couldn't have said that any better. So thank you.
[04:55] Richard : Now, the other thing is, it is a complicated process. There are a huge number of steps, and those steps have to occur in a certain sequence. And it's very easy to miss steps which creates problems down the road or may even scupper a true partnership or selling the event down the road. So can you just tell the listeners, perhaps at a high level how that process looks and your role as that advisor within that process?
[05:33] Paul: Sure. So, first, there has to be an assessment. And we believe that that assessment should answer questions that most rehab business owners who are looking to, at some point in time, sell their company, that they have about this process and about what they can expect. First is what is the value of the business in today's current market? Secondly, they want to understand opportunities for improved value in their business, either in the short term term or potentially in the medium or long term. How can they add value to their business? And then to assist them to create a very specific list of criteria for what would be the best acquirer for that specific individual. And we find that many business owners kind of go into and start talking to acquirers without that list of criteria by which they will evaluate these acquirers when it becomes a beauty pageant, they think they become buyers, tell them how beautiful they are, and they become the one. But they really need to keep that criteria list very close to their process.
[06:55] Richard : We'll continue the conversation after a short break.
[06:57] AD: Music break and Advertisetment at alliance we believe that partnership means creating something that is greater than the sum of its hearts. Our focus is finding physical therapy practices who are already doing good things with the resources and knowledge they have and then providing them the additional tools, resources and expertise to bring them from good to great. To learn more about joining our nationwide community of physical therapy practices while maintaining your brand and clinical practice, visit our website at allianceptp.com
[07:30] Richard : Welcome back to Agile Me, a physical therapy podcast series. If I can just kind of interject a little bit.
[07:37] Paul: Sure.
[07:38] Richard : It's interesting because I believe it's really never too early to engage an advisor in in whatever capacity, because if you leave it until, as a clinic owner. I think if you leave it until the last minute, I think you are losing a lot of opportunity and creating a lot more anxiety and stress and more likely to perhaps have a poor outcome because there isn't the alignment by a seller or truly understanding what the seller really needs and wants. So I think, correct me if I'm wrong, I would imagine that you want to probably engage with the seller long before the really starting the formal process or the deal process per se. Correct?
[08:32] Paul: Absolutely. And I think that does make us unique. There are very few companies that can bring the operational acumen to a physical therapy company. So really that is the first step in our process is to assist in driving that additional value. Richard, sometimes we can double, triple and even have quadrupled the value of these companies by pulling on the right levers. The other steps to this is we want to prepare a list of potential acquirers and that should be based on geography as well as that criteria list that the seller has created. We prepare what we call a confidential information memorandum. That's a quick read book that a CEO of one of these acquiring companies could read in about 15 to 30 minutes that will lead and acquire very quickly to value. We want to maintain 100% confidential process. That is absolutely imperative. And we think the gold in this process is when you have the opportunity to then introduce the seller to the management team of the acquirers in what we call management meetings. And those are acquirers that have submitted an indication of interest and have met most of the criteria. So they're already qualified and they've already met a certain level on that initial offer. And we're working towards executing a letter of intent with the one best acquirer who is in most cases given the best offer and that can have many facets to it and then finally support and manage the due diligence and legal phase all the way through to a closing. Those are the major steps of this process.
[10:28] Richard : Yes. That's great. And I love the emphasis on the criteria best criteria because I don't believe there are necessarily good and bad acquiring entities or buyers per se. They're just different. And each entity alliance is an example of many where we have a certain culture, a certain structure and it's not for everyone. And I think an advisor like yourself is very valuable because you can filter out those entities, those potential partnering entities, to focus on those that you believe would be a fit. Obviously financially you want a certain outcome as well. But I believe buyers, sellers also want to make sure that their legacy is upheld and they feel valued and important entity and depending on who the buyer is, that could be different.
[11:35] Paul: Yeah, you hit on a couple of really huge things there. One is that, yes, every acquirer truly is different and we really believe that the only way to truly get the best understanding possible of that culture is to sit face to face with those who are making the major decisions in a company. You hit on just a huge topic there and I think that's a big part of what we believe can guide and help for companies to make the right match. And there is a match out there, the perfect match. Perfection has only happened once and so no acquirers out there saying they're the perfect match, but as you said, the closest that you can get to that the best opportunity for that seller to have success in the future.
[12:33] Richard : I kind of jokingly talk about it's a bit like dating, speed dating or finding your future wife and if you can establish certain criteria going to the process, it creates a lot less pain and hopefully no default stay on the end of the road. But yeah, funny.
[12:50] Paul: Well, maybe that's my calling in my next business.
[12:53] Richard : You heard it here first on this.
[12:54] Paul: There you go.
[12:55] Richard : This is perhaps a little unfair, but what are perhaps the three key things you would say sellers should consider to help prepare themselves? Because I think there really needs to be a considerable amount of time and focus before they even start the formal process. So how can people best prepare themselves and how can you perhaps help them that way?
[13:20] Paul: Sure, first is making sure that they are operating at a very high level of performance. And many companies believe when you talk about performance it means financial. But I think it starts with clinical that bleeds to operational and then that finally bleeds to financial. So financial is the last outcome that you get when you're strong clinically and you're strong operationally. And I would tell you that nine out of ten companies that we do what we call that outside assessment with are not operating at even 50% of their optimum performance. And that can be a number of different levers to pull to get them there. But it's very uncommon to see companies that are operating at 100% as private equity, especially now. One of the biggest changes that we are seeing is that it's harder for private equity and for acquirers to get their money. Now the bond markets are getting more difficult, the price of debt has gone way up. So these companies are very, very on edge to buy a company if the compliance is not very strong because that's where they believe their biggest risk is. So a strong compliance and a legitimate compliance program I think right now is also critical.
[14:58] Richard : Absolutely. As a buyer I'm happy to pay more for a business if I know it's operated well and fiscally responsible and generating EBITDA. So I think there may be perhaps a misperception and correct me if I'm wrong, but the idea that we're trying to find those entities that perhaps we can polish and we can turn around or get optimized. I would rather look a partner with an entity or buy an entity that is already optimized. And yes, I know I've got to pay more for it up front, but from a risk perspective, it's much less risk for me. So I love the fact that as an advisor, you go in and you get the owners to pull the necessary levers, which benefits them financially, but also benefits the buyer.
[16:00] Paul: Yeah.
[16:03] Richard : We'll continue the conversation after a short.
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[16:47] Richard : Welcome back to Agile Me, a physical therapy leadership podcast.
[16:51] Paul: Here's? Private practice section. We said one of the biggest changes that we were seeing in 2022, that has really kind of gone into 2023, is that acquirers want to move with speed and accuracy. And when you have to dig through and try to determine what are all the upsides that we can get from this opportunity that doesn't move with speed. And so we find the same thing. Acquirers are willing to pay more if the business is operating in high levels of performance as well as a good, solid, strong compliance program.
[17:30] Richard : Absolutely. And compliance is critical. I talk about providing compliant, quality care in a fiscally responsible manner, which really mirrors the kind of the order in which you discussed earlier. And if there isn't compliance, or if the compliance isn't strong enough, that's a deal killer straight away.
[17:50] Paul: Absolutely.
[17:51] Richard : Regardless of what your supposed EBITDA is, real or not real, it doesn't matter.
[17:58] Paul: No question, no question. I think the third key thing that would help to help sellers prepare, and this is often overlooked, is having management alignment and making sure that at that high level of management, that alignment and that everyone is on board with what they must receive from the transaction in order to continue to grow and thrive. Do we really know what we need and when we get that? Are we aligned then? Because as Richard, a lot of what these companies are getting are not just on the front end of a deal, but also on the back end of the deal. So they should be looking to and through the acquisition as to what are we going to do now that we have support in area A, area B, area F, and are we aligned with that? Many times we have worked with companies that have been a due diligence process has started and the acquiring company has just said we're out because there's no alignment here. Everybody wants to go in a different direction and we're not feeling that there is strong alignment and that'll make any acquirer run for the hills.
[19:19] Richard : Absolutely. Again, as a buyer the value is based on that alignment in large part and if there is a likelihood of misalignment or malalignment, then risk level goes up. And obviously as risk goes up, then our ability to pay a premium or what we believe is the appropriate price becomes less likely. So yes, I love that alignment issue. Yes, price is a key factor, but that alignment and again, establishing that criteria in the beginning and discussing that very early on to create that alignment is critical, isn't it?
[19:58] Paul: For sure.
[20:00] Richard : Now, there are always surprises out there with the process, there's always something that happens and I'm sure that you've seen it all with the experience that you've had over the last kind of 20 years. What are perhaps some of the typical surprises that sellers experience when going through the end of the process?
[20:21] Paul: I think the first one is one that is really a positive surprise. And that is because I think many folks out there, their peers have misinformed them over the years regarding the culture of the acquirers, as though they really know the culture of the acquirers because they have a clinic up. The street and a patient came to them and said they don't give good care. So the culture of that entire company must be terrible. And we know that's not the case. And I think what the large majority of our clients find is that in most cases the culture is far better and the folks at the top care way more than they had ever expected.
[21:12] Richard : Yeah, that's incredibly interesting. I agree. I think there's a perception, I don't think necessarily PT schools help, but perhaps that's being unfair, but there is a perception that big is bad and that's nowhere near the truth, is it? I think in many ways you have to be as a larger organization, I think you have to try even harder. So it's funny you raised that. And when I worked for a pirate company, one of the larger entities, the KPIs that we are operating under are actually no more than a lot of smaller entities, even though they were perceived as the kind of the churn type of patient churn. It's funny perception reality, isn't it?
[22:00] Paul: Absolutely, absolutely. When you mentioned this earlier, but I think it's worth saying again is that another surprise is owners are surprised at how different each acquirer is from a cultural perspective as well as from the deal structures that they offer. Each and every company has a very unique culture and a very unique deal structure that they have kind of embedded and have worked with over the years.
[22:31] Richard : Yes, I think the idea of deferred payment to a certain percentage of value, I won't say surprise, but certainly as a surprise for a number of buyers, isn't it? Really? I think they just assume assume that at time of selling their entity, they're just going to get one check and they bank it and that's it. But there's definitely an ongoing commitment, be that in escrow or be that payout at a later date. Correct?
[23:12] Paul: Correct. Yeah. And I think that that's something that really has to be very carefully explained and walked through with the seller because again, it's kind of the land of nowhere. Where is this equity that I have? Where is it going? How does it get paid back? Is it set in stone? How it gets paid back? The multiple it gets paid back? Do I get paid when they get paid? So there's all sorts of different options that come up with that equity, but in some of these transactions, that could be 20 to 30 to even 35, 40% of the deal. So it's important. I think the last big surprise that we see is sellers are very surprised at the level of detail that is being requested in the financial due diligence and how important it is that they have actually done that EBITDA and those adjustments properly because that goes straight to value. And we have so many folks coming to us saying, we did this ourselves, we got into due diligence and the acquirer really dug into those EBITDA adjustments and now I'm only getting three quarters of what I expected. So we walked away and that that's just a waste of time, a waste of money, a waste of energy. And again, most sellers out there have been misinformed, unfortunately, by their peers or by somebody at a cocktail party. That said, everything should be adjusted. You should be able to take all your billing collections and just adjust all that. Come on. So I think that's another big surprise to a lot of sellers.
[24:58] Richard : Yes, buyers are pretty sophisticated. We spend a lot of money and time and resource truly looking at the business under the hood. I'm sure if we could probably get an endoscopy, we probably asked for that as well. We look and as a buyer, we're not looking to nickel and die, we're not looking to lower the price to our advantage. We're just looking at it to truly come up with what is it truly worth valued. So it's not a game of, well, we're going to try our luck and try and reduce the EBITDA and say that expense y should have been applied or z. So I think sometimes I feel that as a seller and if you're not advised carefully, they almost take it somewhat personally and then when the buyer comes back and says, well, actually, this is what we're prepared to pay based on adjusted EBITDA, sure. We'll continue the conversation after a short music break.
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[26:57] Richard : Welcome back to Agile and Me, a physical therapy leadership podcast.
[27:01] Paul: Sure, yeah, and somebody somewhere told them they should get that and unfortunately it's not something that anybody's ever going to give to them.
[27:11] Richard : If we shift a little bit because we talked about sellers, but as a buyer, what does a buyer really need to understand better about sellers? Because I think there's definitely this mismatch, isn't there? Sellers think that they always oftentimes think their practice is worth more. But what do buyers get wrong? How can you help buyers?
[27:36] Paul: Yeah, I think that first of all, to have an understanding that most sellers are in competition also for the best buyer. So the sellers are actually in a competition out there because the buyers aren't going to buy every company and the best buyers certainly aren't going to buy every company. So anybody can just find a buyer who will do a deal more than likely, but how many of them are actually finding the best buyer? And I think also from a buyer's perspective to realize that what a professional competitive process will do is it will result in matching the best acquirer with the best seller for that acquirer. And what we try to do for acquirers is put them on a very fair playing field to try to communicate very clearly timing on certain things that we're going to do within the stages of a process. And that as a seller, the longer they stay in the market, the more chance they have of a breach of some sort of confidentiality. So it has to move at a certain pace and at times buyers are not ready to stay up with that pace. So they may get left behind, but more than likely they probably weren't the best buyer for that specific deal and hopefully they'll be ready on the next one.
[29:10] Richard : Yeah, I'm curious to kind of get your perspective on what tends to slow down the process. So the sellers decided to sell, they've been advised they've got their valuation up, hopefully after being, after coaching and a little bit of time. But as you mentioned, the processes can be very significant on length. But what do you find is commonly the barriers to a normal time frame? What tends to send things off the rails or slows the process down?
[29:50] Paul: The biggest barrier that we see on timing on the process is the legal face and depending upon the background of the lawyer that the seller utilizes, can make an enormous difference to that seller on whether or not that attorney really knows what can and should be protected in a physical therapy deal. What is most important, and that really is married by some of the acquirers have gotten to a point where they can't just use one attorney or even one group anymore. So they have a number of different attorneys that they may sort of farm these deals out to. And so there are times when there's kind of an education process to whether it's the buyer or certainly to the seller attorney. And that's what can really make things move at a snail's pace. And our message to our sellers is know that there's a leaderboard that these acquirers are working on and as soon as they sense that there's an attorney on the other side that just doesn't really get how these deals work, they're going to go to the bottom of that board. They're going to go to the bottom of that list. I think that's one of the big.
[31:22] Richard : Things that's funny because I firmly believe many lawyers destroyed a good deal. I went through Diligence last year and on one call there were 16 lawyers on just one side of the table. I thought, wow, how do we ever get not only the cost associated with the telephone call, but how do we ever get anything done? So I have great empathy when it comes to lawyers. Hopefully there aren't too many lawyers listening.
[31:53] Paul: No. And I'll tell you what, Richard, there are a few attorneys in the country who have done a lot of representation of physical therapy business owners, and we've also worked in deals where they want to use someone locally. And if someone locally has healthcare, typically services healthcare experience, it can go fairly smooth. But I cannot tell you in one instance, one time somebody has called us and said, we have a legal problem here. Something went wrong. We've never seen it. We've never seen it. Yet sometimes some of these attorneys will bark up a tree and they're obviously running up lots and lots of dollars because they're paid by the hour and they're just killing a deal for a seller because the buyers have other options. So it's unfortunate.
[32:53] Richard : Well, I share your either cynicism or realism. Let's leave it at realism.
[32:58] Paul: Yeah, for sure.
[33:00] Richard : What final words of wisdom perhaps, or thoughts do you have for the audience as it pertains to kind of being a sell side advisor or the process generally?
[33:12] Paul: Yeah, you were so eloquent with that, Richard. Sell side advisor. I mean, that was off.
[33:18] Richard : One thing I've learnt today look, this.
[33:22] Paul: Is going to sound pretty harsh, but I promise you this, doing this yourself is like trying to do your own hernia surgery. It's going to hurt. And not that you may not ever get it to the end, but at some point in time I really strongly believe that this is a very complicated process and to get to the best match, you really should have somebody that understands this industry help and guide you. And my other word of wisdom is that utilize an advisor that knows the business and has the ability to improve your value. Now that speaks certainly to what we do. But as I look back over the last 60 companies, 60 companies that we have done assessments on overall running at about a 40% of optimum performance. So there is an enormous amount of value being left on the table when these companies do not find someone to bring in to help them improve that performance before they go into the market. We are seeing changes in this market right now, dramatic changes, where again acquirers are discussing with us how difficult it is to get their capital, how difficult it is due to the increase in rates. They talk about all that dry powder out there, but that doesn't necessarily turn into deals that are going to be paying the kind of multiples that have been paid in the past. But how do you get the same value? Well, if you're going to get a little bit lower multiple but you can increase that EBITDA, you're going to get the exact same value. And if you can lower your risk, you might even push up that multiple that you would have gotten in 2022 anyway because your risk is lowered. So that's my final word of wisdom is again, find someone that can help you improve your business so that you're going out very clean as well as with high levels of performance.
[35:44] Richard : I think that's great.
[35:45] Paul: Thank you.
[35:46] Richard : Paul, if people want to listening and they're thinking of selling their practice, how would they reach out to you and your team?
[35:53] Paul: Absolutely, you can go to our website and basically put your name and number in there or email in there and we'll reach out to set up a call or send me an email. It's very simple. that's for Paul Martin, at the name of the company martinhealthcareadvisors.com and happy to talk, I love talking to rehab business owners.
[36:17] Richard : Thank you so much for your time today, I really appreciate it and I hear busy men and thanks for your wisdom.
[36:23] Paul: Thank you as well, Richard. Great talking to you today.
[36:26] AD: This podcast was brought to you by Alliance Physical Therapy Partners in Agile Virtual Care. For more information, please visit our website allianceptp.com and agilevirtualcare.com. Be sure to follow us on social media and LinkedIn where you can learn more about Alliance Physical Therapy Partners and Agile Virtual Care.