In this episode, we mix things up by letting Jillian Lam from our own Mergers and Acquisitions team take the lead in discussing the moving and shaking that is happening in the business side of the physical therapy world.
[00:39] Jillian: We could say all right, good morning, good morning. I hope everyone is doing great this Friday morning. Exciting to be back on Agile and Me's podcast series. So wow, there has been a lot of buzz going on concerning the M&A healthcare activity, especially in the physical therapy space. So not only has it been a weekly topic of conversation within calls, we have just internally as well as with practice owners, but I've personally seen various social media platform posts, articles circling around. In fact, I forward the both of you a recent podcast within an article from a PT healthcare consultant, which brings us and happy to kick off today's discussion updates regarding activity in the PT space. Over the past couple of months, we have definitely seen some rapid changes compared to 2022 and earlier on alone, looking at the market, there has been far less deals completed at this time compared to the previous year. So to begin and to paint a better picture on the rapid change of M&A activity, Steve, Richard, would you be able to give an update for us on the macro and overall environment at this time?
[01:59] Richard: Thanks Jill, for the introduction. There certainly has been a buzz. I don't know if it's a good buzz or a bad buzz, but there's certainly a buzz. I'll let Steve kick off with this question and we'll go from there perhaps.
[02:15] Steve: Yeah, no, I appreciate it and it's exciting to be back on to update our listeners on what's going on. So in reality, the last three months has been almost a 180 in the M & A market. I would say we started to see it a little bit in the summer, maybe late Q2, where we were like, wow, things are starting to change a little bit. And it's really relating to the macro economy of things have gotten more expensive and not in terms of price or anything like that. But it's harder to pay for things, not just at your gas station around the corner or your grocery store, but it's harder for businesses to afford things. They don't have as much cash as they were sitting on the last couple of years and they also the debt, getting loans and having debt over the last basically ten years, but the last two years, significantly, it's been very cheap to borrow money and that's just not the case anymore. Rates are being pushed up, which means borrowing money is a lot more expensive and that makes doing deals a lot more difficult. So what that trickles down to is it's not that buying isn't happening anymore. It's that buyers are a lot more particular on what they want. I would say they're doing more diligence and they're being much more selective with what they are pursuing. It was the last two years really just if somebody was interested, we'll buy it. And price kind of were almost out of the question. It was kind of like, yes, we'll pay that. Sure. That's just not the case anymore. There's no just, we'll pay whatever it takes, we'll take it. That's just not the reality. So what really happened over the last three months is a big slowdown. I mean us, fortunately, we were able to do a deal in December, so that was great. But realistically, specifically in the PE backed kind of buyers in the physical therapy space, it's really hard to find a lot of deals that got done over the last three months. And the one you can think about is Motion PT, which is a very large group that was bought by influence, but that closed recently. But that process started eight months ago. So at the time when the process, things were still a little bit frothy is the word I like to use. But now it's come down. So I would say what we've seen last three months and at least the next three months is probably going to be very similar.
[05:17] Richard: Yes, huge amount to unpack. Thanks Steve, for kind of that overview. I'm sure of the next 30 minutes, we'll kind of unpack some of that. But what strikes me, what struck me is not that we were unaware of what was coming down the track. It was really the speed of it. And perhaps we've been somewhat complacent because over the last, I'd say ten years, really, we've had an unusual environment. We've been operating and got used to that as the norm, but it wasn't. So I think I was certainly surprised and continued to be surprised even since our last podcast at how things have changed. It's not, I think, unreasonable looking back, but it was just a surprise. And I don't think we're certainly out of it yet, and we might even continue in the same direction with the headwinds that we have. But I think we're definitely in a different position now than we were even January 1.
[06:27] Steve: Completely agree.
[06:31] Jillian: You gave us a picture a bit more on the macroeconomic changes in the beginning, Steve, and I know you talked about the recent transaction with Confluent Purchasing Motion, but can you really dive into what exactly occurred within the last three months as it pertains deals of really starting the market, taking a look? I know as Richard mentioned, we had podcasts that went on. I know there were a couple of different, as mentioned articles circulating around, but that kind of dived into 2023. But can you really give us a high level on that?
[07:06] Steve: Yeah, I think it really comes down to I mentioned there's not a lot of deals getting done. And I think that comes down to also profitability of the clinics that a lot of buyers are looking at. I think over the last year or two, there was a lot more justification in terms of growth or synergies or even EBITDA adjustments to a clinic. And their profitability, I think, was more easily justified over the last two years and I think the last six months. And we're in the same boat where operating a physical therapy clinic profitably is really hard and it's a challenge. So I think buyers like ourselves really taking a deeper look at the financials and saying, is this the right fit for us? Is the potential there? And are we willing to pay the price? And to be honest with you, it's not entirely the owner's fault. I mean, there is a lot of headwinds going against owners these days. Between just the macro PT industry, which Richard can hit on a little bit better than me, when I'm talking about things getting more expensive, it trickles all the way down to your PT clinic, right? I mean, your supplies, your staff, right? Everything is more expensive and it's hitting every clinic's bottom line. And so getting to profitability has become even more challenging than what we've been used to.
[08:49] Richard: I'd like to add what has surprised me as well the last few months is entities that we've had outreach with over the last, say, 12-18 months, even 24 months, a number of them have just shut their doors.
[09:06] Jillian: They have, Richard, I can attest.
[09:09] Richard: Not only are they not making money, they're losing money. And that's only occurred recently before I think overall outpatient PT private practices were relatively bullish, and I think at a very large scale, payers and legislators need to understand that there aren't these huge margins and profits associated with many components of healthcare. And unless they address some of these fundamental dynamics in the market, I think it's going to be a rough ride for a lot of private practices. As Steve said, there's really a thin line between making money and losing money.
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[10:36] Richard: And that's not because people are greedy. It's just the fact of the macroeconomic challenges associated with inflation. High interest rates, wage inflation due to the supply and demand mismatch. So there's quite a lot to unpack and certainly don't want to be pessimistic, but kind of Debbie downer here, but it's tough at the moment.
[10:58] Jillian: Definitely agree with that. I haven't seen too much activity going on at the current moment. So what can you say? What is happening with the small to medium business M&A activity?
[11:09] Steve: Yeah, I mean, in general, we're obviously a physical therapy company here and that's where this podcast is focused. But at even a higher level, deals are very difficult to get done these days. Even starting from the top, even the big deals that used to seeing big private companies getting bought by private equity firms and companies going public, right. That's just not happening anymore. And it's due to macroeconomic conditions and it's due to, like we mentioned earlier, debt being very expensive. So in order to finance these deals, it's very difficult now. It's a trickle down effect. Right? I mean, all of this, it comes down to if that's happening at the top of the food chain, let's say, then it's going to trickle down to your medium and small businesses because it's just how it works. So these small and medium sized business activities in general, not just physical therapy, are really almost nonexistent now. You'll hear about there's always going to be some buyers during times like these that are just buying everything. And that's not saying if you get a good offer and somebody's offering you to pay for your business, I mean, take it, good for you. I will say I wouldn't put a lot of trust in somebody's strategy at a time like this or just their overall output on how it's working to actually make it work. So be a little bit cautious. And it's not to say we're not doing deals, but it's got to be the right deal. So I think a lot of buyers in all spaces, not just healthcare, have really kind of clamped down a little bit harder on diligence and really putting their nose in the business and making sure it's the right fit.
[13:13] Richard: Bottom line, for smaller practices looking to sell. It's essentially that buyers are more discerning. They are not going to be as forgiving as they were with regards to the performance of the selling entity, whereas perhaps some credit would have been given for things that normally may not have been done. So that might be adjustments. I think you're going to see those disappear and it's going to be much more black and white, I think, and truly based on accurate valuation of current performance.
[13:55] Steve: Yeah, I think that's a good point, Richard and I'll pick it back on you a little bit, but I feel over the last two years it was almost like, wow, this clinic is staffed really well. I'm paying for it, right. I care if they're profitable or not, but they have staff, which as we know, is such a difficult part of our industry right now. So if they have the staff, then I can make this clinic profitable, right? I would say that has changed. Right now, it's both. It's saying, great, you do have staff, but also, are you making any money what do you think?
[14:33] Richard: Yes, and I think the perception by small practices, because there was so much outreach previously and still continues to be outreach, but there was so much outreach that they had a false perception that they were of significant more value than perhaps they were. And that's a difficult message to tell the private practice owner and massages the ego, particularly when you're a buyer. But on the flip side, it comes down to show me the EBITDA.
[15:09] Steve: Yeah, I think we're known as a buyer in the market who is very full and transparent with our conversations and we don't hide behind walls or things that we're thinking. And I think to your point, it's a good time to bring it up is the fact that what you heard your friends or other people in the industry getting purchased for over the last couple of years. Unfortunately, it's just not the reality now. And it's a hard pill for everybody to swallow, but it's just what it is now. And accepting that this is more of the new norm is really important for buyers and sellers. Right. I've had to accept it that it's not as easy to get deals done. And I think sellers also have to really ground themselves and say, I do have a good business and if we do want to sell, you can still make a serious dollar. Just because it's not quite as big as it was the last two years doesn't mean you're not going to get compensated for your business. It just means that this is kind of the new norm and you should kind of accept that reality and know times. Don't think if in three months it's going to go back to that. I really don't want a seller to just think if I hold on for another three to six months, like it's going to go back to 2021 and all these things and all of a sudden it's 2026 and you haven't got to retire yet. Right. And that's not what we want. Right. That's not what you want. So I think it's just accepting where things are at right now.
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[17:42] Richard: I think the private practice owner does have some levers to pull, so it's not as if they've just got to accept a lower valuation. It's up to the private practice owner, really to continue to optimize their business and grow their business and increase EBITDA to then offset any reduction, then maybe in regards to the multiple that's applied for a purchase price. So it's really a time for private practice owners to truly roll up their sleeves even more and dig in even harder, which is exactly the same as what the larger companies are having to do. So it's not as if it's any different, but if they want a good valuation, they're going to have to work a bit harder for it.
[18:29] Steve: Yeah, and I think this is good. Jill does a great job of this, too. And when we reach out, I mean, part of my job is to work with sellers looking to sell your business. So even if you're thinking about it, or to Richard's point, right now, you're saying, how can I increase my valuation? How can I do that? Right. Look, we are fully happy to have a call and discuss and if you have some information you want to share, we're transparent. I can go down that. We can talk to our operators and we can say, look, these are the three, four, five things that you can improve on over the next some of these things can be improved over in three to six months and really make a difference in your business. And we're happy to have that call. If you win, we win. So it's a win win for all of us. So don't be shy about reaching out and just saying, all right, how can they do this? Or, how are you guys handling this? And where's the efficiencies I'm missing? Or is there something I'm overspending on? Right? Or what makes me more attractive? We're happy to have those conversations anytime. So to Richard's point, your valuation can be there. You got to figure it out yourselves and we'll help you along the way. Yeah, I think it comes back to we're just being more selective and diligent. And I think one of the other things that is more on our radar than it was the past year is the overall strategic vision of the company. I think each large acquiring entity has a strategic plan. Of course they do. I think over the last two years, it was kind of even if it's a little outside of our strategic plan or maybe a geography that we're not super interested in, but, hey, they're willing to sell and it makes sense, let's buy it. Right. I think acquiring entities like us have a strategic vision that they have to stick to a little bit more closely now, and it really has to fit what the board and the executive team thinks is the right way for the business to go. So I think that's a big part that's starting to be more in tune and I think that's really important. So it's really focusing on what the real goal end goal is for the company. And then, to be honest with you, other acquiring entities, it's not hard to look around. But even some of the larger entities, some of them have basically stopped acquiring. And almost to the point where I know some of them for a fact and are actually closing down clinics themselves. Not profitable clinics because they may have over acquired or over open over the last few years. And they're realizing that maybe it isn't about how many clinics you have, but it's more about are these clinics making money and do I have the staff to staff all these clinics? Right? And I think that's just an overall theme that's being hit on the head a little bit harder now.
[21:38] Richard: Yeah, I often think to myself about family budgeting. What I mean by that is the fact that when you've got a little spare cash in the family budget, then you buy things that are not only needs but wants. And as the budget gets a little bit tighter then you a little bit more selective with regards to what you buy and it becomes more of the more of the needs rather than the wants. And I think that's exactly the same for a business. When money is relatively cheap, historically cheap, then I think the amount of diligence and perhaps attention to detail is a little bit less. You go out and you're feeling rich and wealthy and you go out and get that larger TV or you get that extra sound bar that you don't necessarily need but look nice, wouldn't it? And the same thing with the company. I think you really just focus more on the core business, core markets, core strategy and that's not a bad thing. I think in some ways it's very healthy in the long run, but that's.
[22:49] Steve: How I perceive I might steal that analogy.
[22:51] Jillian: Richard, that's very well put. So, considering the pace and changes we're experiencing, how should a small therapy practice owner think differently regarding their expectations when they're looking to sell their therapy business?
[23:09] Steve: I don't think the process is going to change drastically. Well, at least not from our point of view. Right. I think the way we've handled deals over the last year has been a really good process. I think between first couple of calls, getting to know the team, where you fit to the NDA, to sharing some financials, to discussing intricacies of the clinic and financials, and then moving right into an Loi if it fits for both groups, and then closing within 60 days of signing the loi, I don't think that changes at all. Actually. I do think timing wise it can be the same. I think there might be to what we've been saying. When we say diligence it just means diving a little bit deeper, asking a little bit more questions. I think over the last couple of years some sellers were able to just throw some financials at a big buyer and say here's my clinic, here's my numbers and they might got an offer the next day and closed in 30 days. And that's just what happened. Right. I just don't think that's what that's not my expectation of what I think most people are going to do. I think it's going to be the same timeline. It's just going to be a little bit more diligent. And also, I think, small practice owners, that their expectations of selling, and we hit it a little bit. It's not saying your valuation has to go lower, but it is a number you'll hear is that EBITDA multiple will be less than what you probably heard the last two years. Now, that's a multiple, right? So, like Richard mentioned, if you get your EBITDA higher, that multiple doesn't affect the total valuation as much. So there are ways to still get to the price point that you want when both sides want. So I think it's just setting those expectations, knowing that the buyers might ask a few more questions, but also know that there's probably not going to be as many buyers in the mix as there probably were the last couple of years. I think everybody was in the process, and it was very competitive. And I think that buyer universe is going to be smaller.
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[25:55] Richard: I think the other thing I don't necessarily have evidence of this yet. I can think of one or two instances, perhaps. But I think what may happen for the smaller practices that are looking to sell is there may be some retraining trading or certainly entities walking away once really looking at diligence. So what I might mean by retrading is you may be offered a certain price up front, but then once diligence occurs, the acquiring entity, the new partner, is more than likely to come back and say, hey. Based on further analysis, the valuation is actually less, which is always frustrating for both sides because time and money has been spent on it. At that point, perhaps that might not happen so much, but certainly I'm sure that entities that put up perhaps a higher than a higher price than other potential acquiring entities, buyers, I think you'll find that once they really take a look, they'll just walk away.
[27:04] Steve: Yeah, and I think that's a really good point, Richard, for a seller to be a little bit cautious when they receive offers, if you're receiving offers in a certain kind of area, all within kind of the same price range, and then one or two buyers are significantly above that. Like I said, good for you. I hope it goes through. But at the same time, buyers and I don't have names or something, but it's a large world, and I've been in it for a while. Some buyers purposely put offer a lot higher to be selected, and when they're selected, that means you aren't allowed to talk to other buyers during that process. So basically you become exclusive, which is a term I think we've discussed on other podcasts. But they do that in order to, quote, win the loi. And then they almost are banking on going through diligence and the valuation coming down. Now, I'm not saying that happens all the time, but it is a strategy that's been used. So I would just be very wary of a price that is significantly different from any other offers.
[28:19] Jillian: Thank you, Steve, for that. And to sum it up, as we have a crystal ball in front of us and taking a look into the near future, do you believe things will begin to loosen up over the next couple of months? The end of the year, next year? What are you foreseeing?
[28:38] Steve: I like to tell people I probably would be sitting on a beach on my own private island if I knew what was actually going to happen in six months, because you could probably do very well for yourself. But we do talk our private equity BPOC is a really fantastic private equity sponsor who has a lot of insights too, but yet again, they're not predictors either. I think it's really hard to say when it's going to loosen back up. I think it's more of are things going to become more stable? I think the volatility of the markets and the macroeconomics and inflation was zero and all of a sudden, a year or six months later, the rates have been pushed up I don't know how many times every month, basically the last six months. Right. I think what's going to happen, which is really good, is there's going to be some stability eventually. I think in the next, hopefully three months, that rates will stop being raised, but I don't think they're going to be dropped again. I think there's going to be stability in the market. I think everybody's going to understand, all right, okay, this is how we have to run our business now. And I think it's learning what that kind of stable environment is. But in a stable environment it's great in a way, right. Because then you actually understand, like, all right, this is how I have to do things. Things are going to change drastically now, so let's figure out how to operate in this kind of stable new environment. And that's my best predictor about this next six to twelve months is not loose enough, but more of some more stability in terms of kind of the volatility going on.
[30:26] Richard: Yeah, I think from my perspective, I was surprised at how quickly things seized up. I wasn't expecting I knew they were going to slow down, but really at the moment things seemed to have just seized up. And I know that I don't know what's going to happen in the future. I will probably be surprised at how things get moving again. I don't know when I'm like Steve, I certainly don't think it's going to be anytime soon. So I think certainly we're looking at probably 2024, but I could be eating my own words very easily with that as well. But I agree with Steve. Companies only struggle when there is instability or lack of understanding. And if you operate whatever the environment is, as long as what that environment is in its steady state, you can plan accordingly. But it's very difficult for organizations to truly get a solid footing if the goalposts keep moving. And that's really what's happened the last three months or six months. And we just want those goalposts to be put in one place. Yeah, if it's at 6% or six and a half percent interest rate or whatever it is, that's fine, but we just need to really kind of calm the market and really kind of reset regroup on a norm.
[32:01] Steve: Yeah, and I agree. And I think to your point where instead of companies like being so unaware of what's going on and worried about inflation and all the consequences of the pandemic and everything like that, it's kind of like, hey, let's just focus on our business, right? Let's quit worrying about what's going on all over the place outside of this. Let's revisit what we're good at and let's focus on that. And then because it's stability, let's get ourselves stable in this and then figure out the next step forward. And I think everybody should kind of have that mindset.
[32:42] Jillian: Well, Steve, Richard, greatly appreciate the informative, insight and overall m and a summary you gave our listeners. This podcast alone resonates with many practice owners as well as healthcare leaders, giving them a better understanding and color rather than some of the gray area we are seeing, but most importantly, alleviating some of the worry for the upcoming months in 2023. So thank you both so much.
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Podcast Transcript
[00:39] Jillian: We could say all right, good morning, good morning. I hope everyone is doing great this Friday morning. Exciting to be back on Agile and Me's podcast series. So wow, there has been a lot of buzz going on concerning the M&A healthcare activity, especially in the physical therapy space. So not only has it been a weekly topic of conversation within calls, we have just internally as well as with practice owners, but I've personally seen various social media platform posts, articles circling around. In fact, I forward the both of you a recent podcast within an article from a PT healthcare consultant, which brings us and happy to kick off today's discussion updates regarding activity in the PT space. Over the past couple of months, we have definitely seen some rapid changes compared to 2022 and earlier on alone, looking at the market, there has been far less deals completed at this time compared to the previous year. So to begin and to paint a better picture on the rapid change of M&A activity, Steve, Richard, would you be able to give an update for us on the macro and overall environment at this time?
[01:59] Richard: Thanks Jill, for the introduction. There certainly has been a buzz. I don't know if it's a good buzz or a bad buzz, but there's certainly a buzz. I'll let Steve kick off with this question and we'll go from there perhaps.
[02:15] Steve: Yeah, no, I appreciate it and it's exciting to be back on to update our listeners on what's going on. So in reality, the last three months has been almost a 180 in the M & A market. I would say we started to see it a little bit in the summer, maybe late Q2, where we were like, wow, things are starting to change a little bit. And it's really relating to the macro economy of things have gotten more expensive and not in terms of price or anything like that. But it's harder to pay for things, not just at your gas station around the corner or your grocery store, but it's harder for businesses to afford things. They don't have as much cash as they were sitting on the last couple of years and they also the debt, getting loans and having debt over the last basically ten years, but the last two years, significantly, it's been very cheap to borrow money and that's just not the case anymore. Rates are being pushed up, which means borrowing money is a lot more expensive and that makes doing deals a lot more difficult. So what that trickles down to is it's not that buying isn't happening anymore. It's that buyers are a lot more particular on what they want. I would say they're doing more diligence and they're being much more selective with what they are pursuing. It was the last two years really just if somebody was interested, we'll buy it. And price kind of were almost out of the question. It was kind of like, yes, we'll pay that. Sure. That's just not the case anymore. There's no just, we'll pay whatever it takes, we'll take it. That's just not the reality. So what really happened over the last three months is a big slowdown. I mean us, fortunately, we were able to do a deal in December, so that was great. But realistically, specifically in the PE backed kind of buyers in the physical therapy space, it's really hard to find a lot of deals that got done over the last three months. And the one you can think about is Motion PT, which is a very large group that was bought by influence, but that closed recently. But that process started eight months ago. So at the time when the process, things were still a little bit frothy is the word I like to use. But now it's come down. So I would say what we've seen last three months and at least the next three months is probably going to be very similar.
[05:17] Richard: Yes, huge amount to unpack. Thanks Steve, for kind of that overview. I'm sure of the next 30 minutes, we'll kind of unpack some of that. But what strikes me, what struck me is not that we were unaware of what was coming down the track. It was really the speed of it. And perhaps we've been somewhat complacent because over the last, I'd say ten years, really, we've had an unusual environment. We've been operating and got used to that as the norm, but it wasn't. So I think I was certainly surprised and continued to be surprised even since our last podcast at how things have changed. It's not, I think, unreasonable looking back, but it was just a surprise. And I don't think we're certainly out of it yet, and we might even continue in the same direction with the headwinds that we have. But I think we're definitely in a different position now than we were even January 1.
[06:27] Steve: Completely agree.
[06:31] Jillian: You gave us a picture a bit more on the macroeconomic changes in the beginning, Steve, and I know you talked about the recent transaction with Confluent Purchasing Motion, but can you really dive into what exactly occurred within the last three months as it pertains deals of really starting the market, taking a look? I know as Richard mentioned, we had podcasts that went on. I know there were a couple of different, as mentioned articles circulating around, but that kind of dived into 2023. But can you really give us a high level on that?
[07:06] Steve: Yeah, I think it really comes down to I mentioned there's not a lot of deals getting done. And I think that comes down to also profitability of the clinics that a lot of buyers are looking at. I think over the last year or two, there was a lot more justification in terms of growth or synergies or even EBITDA adjustments to a clinic. And their profitability, I think, was more easily justified over the last two years and I think the last six months. And we're in the same boat where operating a physical therapy clinic profitably is really hard and it's a challenge. So I think buyers like ourselves really taking a deeper look at the financials and saying, is this the right fit for us? Is the potential there? And are we willing to pay the price? And to be honest with you, it's not entirely the owner's fault. I mean, there is a lot of headwinds going against owners these days. Between just the macro PT industry, which Richard can hit on a little bit better than me, when I'm talking about things getting more expensive, it trickles all the way down to your PT clinic, right? I mean, your supplies, your staff, right? Everything is more expensive and it's hitting every clinic's bottom line. And so getting to profitability has become even more challenging than what we've been used to.
[08:49] Richard: I'd like to add what has surprised me as well the last few months is entities that we've had outreach with over the last, say, 12-18 months, even 24 months, a number of them have just shut their doors.
[09:06] Jillian: They have, Richard, I can attest.
[09:09] Richard: Not only are they not making money, they're losing money. And that's only occurred recently before I think overall outpatient PT private practices were relatively bullish, and I think at a very large scale, payers and legislators need to understand that there aren't these huge margins and profits associated with many components of healthcare. And unless they address some of these fundamental dynamics in the market, I think it's going to be a rough ride for a lot of private practices. As Steve said, there's really a thin line between making money and losing money.
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[10:36] Richard: And that's not because people are greedy. It's just the fact of the macroeconomic challenges associated with inflation. High interest rates, wage inflation due to the supply and demand mismatch. So there's quite a lot to unpack and certainly don't want to be pessimistic, but kind of Debbie downer here, but it's tough at the moment.
[10:58] Jillian: Definitely agree with that. I haven't seen too much activity going on at the current moment. So what can you say? What is happening with the small to medium business M&A activity?
[11:09] Steve: Yeah, I mean, in general, we're obviously a physical therapy company here and that's where this podcast is focused. But at even a higher level, deals are very difficult to get done these days. Even starting from the top, even the big deals that used to seeing big private companies getting bought by private equity firms and companies going public, right. That's just not happening anymore. And it's due to macroeconomic conditions and it's due to, like we mentioned earlier, debt being very expensive. So in order to finance these deals, it's very difficult now. It's a trickle down effect. Right? I mean, all of this, it comes down to if that's happening at the top of the food chain, let's say, then it's going to trickle down to your medium and small businesses because it's just how it works. So these small and medium sized business activities in general, not just physical therapy, are really almost nonexistent now. You'll hear about there's always going to be some buyers during times like these that are just buying everything. And that's not saying if you get a good offer and somebody's offering you to pay for your business, I mean, take it, good for you. I will say I wouldn't put a lot of trust in somebody's strategy at a time like this or just their overall output on how it's working to actually make it work. So be a little bit cautious. And it's not to say we're not doing deals, but it's got to be the right deal. So I think a lot of buyers in all spaces, not just healthcare, have really kind of clamped down a little bit harder on diligence and really putting their nose in the business and making sure it's the right fit.
[13:13] Richard: Bottom line, for smaller practices looking to sell. It's essentially that buyers are more discerning. They are not going to be as forgiving as they were with regards to the performance of the selling entity, whereas perhaps some credit would have been given for things that normally may not have been done. So that might be adjustments. I think you're going to see those disappear and it's going to be much more black and white, I think, and truly based on accurate valuation of current performance.
[13:55] Steve: Yeah, I think that's a good point, Richard and I'll pick it back on you a little bit, but I feel over the last two years it was almost like, wow, this clinic is staffed really well. I'm paying for it, right. I care if they're profitable or not, but they have staff, which as we know, is such a difficult part of our industry right now. So if they have the staff, then I can make this clinic profitable, right? I would say that has changed. Right now, it's both. It's saying, great, you do have staff, but also, are you making any money what do you think?
[14:33] Richard: Yes, and I think the perception by small practices, because there was so much outreach previously and still continues to be outreach, but there was so much outreach that they had a false perception that they were of significant more value than perhaps they were. And that's a difficult message to tell the private practice owner and massages the ego, particularly when you're a buyer. But on the flip side, it comes down to show me the EBITDA.
[15:09] Steve: Yeah, I think we're known as a buyer in the market who is very full and transparent with our conversations and we don't hide behind walls or things that we're thinking. And I think to your point, it's a good time to bring it up is the fact that what you heard your friends or other people in the industry getting purchased for over the last couple of years. Unfortunately, it's just not the reality now. And it's a hard pill for everybody to swallow, but it's just what it is now. And accepting that this is more of the new norm is really important for buyers and sellers. Right. I've had to accept it that it's not as easy to get deals done. And I think sellers also have to really ground themselves and say, I do have a good business and if we do want to sell, you can still make a serious dollar. Just because it's not quite as big as it was the last two years doesn't mean you're not going to get compensated for your business. It just means that this is kind of the new norm and you should kind of accept that reality and know times. Don't think if in three months it's going to go back to that. I really don't want a seller to just think if I hold on for another three to six months, like it's going to go back to 2021 and all these things and all of a sudden it's 2026 and you haven't got to retire yet. Right. And that's not what we want. Right. That's not what you want. So I think it's just accepting where things are at right now.
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[17:42] Richard: I think the private practice owner does have some levers to pull, so it's not as if they've just got to accept a lower valuation. It's up to the private practice owner, really to continue to optimize their business and grow their business and increase EBITDA to then offset any reduction, then maybe in regards to the multiple that's applied for a purchase price. So it's really a time for private practice owners to truly roll up their sleeves even more and dig in even harder, which is exactly the same as what the larger companies are having to do. So it's not as if it's any different, but if they want a good valuation, they're going to have to work a bit harder for it.
[18:29] Steve: Yeah, and I think this is good. Jill does a great job of this, too. And when we reach out, I mean, part of my job is to work with sellers looking to sell your business. So even if you're thinking about it, or to Richard's point, right now, you're saying, how can I increase my valuation? How can I do that? Right. Look, we are fully happy to have a call and discuss and if you have some information you want to share, we're transparent. I can go down that. We can talk to our operators and we can say, look, these are the three, four, five things that you can improve on over the next some of these things can be improved over in three to six months and really make a difference in your business. And we're happy to have that call. If you win, we win. So it's a win win for all of us. So don't be shy about reaching out and just saying, all right, how can they do this? Or, how are you guys handling this? And where's the efficiencies I'm missing? Or is there something I'm overspending on? Right? Or what makes me more attractive? We're happy to have those conversations anytime. So to Richard's point, your valuation can be there. You got to figure it out yourselves and we'll help you along the way. Yeah, I think it comes back to we're just being more selective and diligent. And I think one of the other things that is more on our radar than it was the past year is the overall strategic vision of the company. I think each large acquiring entity has a strategic plan. Of course they do. I think over the last two years, it was kind of even if it's a little outside of our strategic plan or maybe a geography that we're not super interested in, but, hey, they're willing to sell and it makes sense, let's buy it. Right. I think acquiring entities like us have a strategic vision that they have to stick to a little bit more closely now, and it really has to fit what the board and the executive team thinks is the right way for the business to go. So I think that's a big part that's starting to be more in tune and I think that's really important. So it's really focusing on what the real goal end goal is for the company. And then, to be honest with you, other acquiring entities, it's not hard to look around. But even some of the larger entities, some of them have basically stopped acquiring. And almost to the point where I know some of them for a fact and are actually closing down clinics themselves. Not profitable clinics because they may have over acquired or over open over the last few years. And they're realizing that maybe it isn't about how many clinics you have, but it's more about are these clinics making money and do I have the staff to staff all these clinics? Right? And I think that's just an overall theme that's being hit on the head a little bit harder now.
[21:38] Richard: Yeah, I often think to myself about family budgeting. What I mean by that is the fact that when you've got a little spare cash in the family budget, then you buy things that are not only needs but wants. And as the budget gets a little bit tighter then you a little bit more selective with regards to what you buy and it becomes more of the more of the needs rather than the wants. And I think that's exactly the same for a business. When money is relatively cheap, historically cheap, then I think the amount of diligence and perhaps attention to detail is a little bit less. You go out and you're feeling rich and wealthy and you go out and get that larger TV or you get that extra sound bar that you don't necessarily need but look nice, wouldn't it? And the same thing with the company. I think you really just focus more on the core business, core markets, core strategy and that's not a bad thing. I think in some ways it's very healthy in the long run, but that's.
[22:49] Steve: How I perceive I might steal that analogy.
[22:51] Jillian: Richard, that's very well put. So, considering the pace and changes we're experiencing, how should a small therapy practice owner think differently regarding their expectations when they're looking to sell their therapy business?
[23:09] Steve: I don't think the process is going to change drastically. Well, at least not from our point of view. Right. I think the way we've handled deals over the last year has been a really good process. I think between first couple of calls, getting to know the team, where you fit to the NDA, to sharing some financials, to discussing intricacies of the clinic and financials, and then moving right into an Loi if it fits for both groups, and then closing within 60 days of signing the loi, I don't think that changes at all. Actually. I do think timing wise it can be the same. I think there might be to what we've been saying. When we say diligence it just means diving a little bit deeper, asking a little bit more questions. I think over the last couple of years some sellers were able to just throw some financials at a big buyer and say here's my clinic, here's my numbers and they might got an offer the next day and closed in 30 days. And that's just what happened. Right. I just don't think that's what that's not my expectation of what I think most people are going to do. I think it's going to be the same timeline. It's just going to be a little bit more diligent. And also, I think, small practice owners, that their expectations of selling, and we hit it a little bit. It's not saying your valuation has to go lower, but it is a number you'll hear is that EBITDA multiple will be less than what you probably heard the last two years. Now, that's a multiple, right? So, like Richard mentioned, if you get your EBITDA higher, that multiple doesn't affect the total valuation as much. So there are ways to still get to the price point that you want when both sides want. So I think it's just setting those expectations, knowing that the buyers might ask a few more questions, but also know that there's probably not going to be as many buyers in the mix as there probably were the last couple of years. I think everybody was in the process, and it was very competitive. And I think that buyer universe is going to be smaller.
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[25:55] Richard: I think the other thing I don't necessarily have evidence of this yet. I can think of one or two instances, perhaps. But I think what may happen for the smaller practices that are looking to sell is there may be some retraining trading or certainly entities walking away once really looking at diligence. So what I might mean by retrading is you may be offered a certain price up front, but then once diligence occurs, the acquiring entity, the new partner, is more than likely to come back and say, hey. Based on further analysis, the valuation is actually less, which is always frustrating for both sides because time and money has been spent on it. At that point, perhaps that might not happen so much, but certainly I'm sure that entities that put up perhaps a higher than a higher price than other potential acquiring entities, buyers, I think you'll find that once they really take a look, they'll just walk away.
[27:04] Steve: Yeah, and I think that's a really good point, Richard, for a seller to be a little bit cautious when they receive offers, if you're receiving offers in a certain kind of area, all within kind of the same price range, and then one or two buyers are significantly above that. Like I said, good for you. I hope it goes through. But at the same time, buyers and I don't have names or something, but it's a large world, and I've been in it for a while. Some buyers purposely put offer a lot higher to be selected, and when they're selected, that means you aren't allowed to talk to other buyers during that process. So basically you become exclusive, which is a term I think we've discussed on other podcasts. But they do that in order to, quote, win the loi. And then they almost are banking on going through diligence and the valuation coming down. Now, I'm not saying that happens all the time, but it is a strategy that's been used. So I would just be very wary of a price that is significantly different from any other offers.
[28:19] Jillian: Thank you, Steve, for that. And to sum it up, as we have a crystal ball in front of us and taking a look into the near future, do you believe things will begin to loosen up over the next couple of months? The end of the year, next year? What are you foreseeing?
[28:38] Steve: I like to tell people I probably would be sitting on a beach on my own private island if I knew what was actually going to happen in six months, because you could probably do very well for yourself. But we do talk our private equity BPOC is a really fantastic private equity sponsor who has a lot of insights too, but yet again, they're not predictors either. I think it's really hard to say when it's going to loosen back up. I think it's more of are things going to become more stable? I think the volatility of the markets and the macroeconomics and inflation was zero and all of a sudden, a year or six months later, the rates have been pushed up I don't know how many times every month, basically the last six months. Right. I think what's going to happen, which is really good, is there's going to be some stability eventually. I think in the next, hopefully three months, that rates will stop being raised, but I don't think they're going to be dropped again. I think there's going to be stability in the market. I think everybody's going to understand, all right, okay, this is how we have to run our business now. And I think it's learning what that kind of stable environment is. But in a stable environment it's great in a way, right. Because then you actually understand, like, all right, this is how I have to do things. Things are going to change drastically now, so let's figure out how to operate in this kind of stable new environment. And that's my best predictor about this next six to twelve months is not loose enough, but more of some more stability in terms of kind of the volatility going on.
[30:26] Richard: Yeah, I think from my perspective, I was surprised at how quickly things seized up. I wasn't expecting I knew they were going to slow down, but really at the moment things seemed to have just seized up. And I know that I don't know what's going to happen in the future. I will probably be surprised at how things get moving again. I don't know when I'm like Steve, I certainly don't think it's going to be anytime soon. So I think certainly we're looking at probably 2024, but I could be eating my own words very easily with that as well. But I agree with Steve. Companies only struggle when there is instability or lack of understanding. And if you operate whatever the environment is, as long as what that environment is in its steady state, you can plan accordingly. But it's very difficult for organizations to truly get a solid footing if the goalposts keep moving. And that's really what's happened the last three months or six months. And we just want those goalposts to be put in one place. Yeah, if it's at 6% or six and a half percent interest rate or whatever it is, that's fine, but we just need to really kind of calm the market and really kind of reset regroup on a norm.
[32:01] Steve: Yeah, and I agree. And I think to your point where instead of companies like being so unaware of what's going on and worried about inflation and all the consequences of the pandemic and everything like that, it's kind of like, hey, let's just focus on our business, right? Let's quit worrying about what's going on all over the place outside of this. Let's revisit what we're good at and let's focus on that. And then because it's stability, let's get ourselves stable in this and then figure out the next step forward. And I think everybody should kind of have that mindset.
[32:42] Jillian: Well, Steve, Richard, greatly appreciate the informative, insight and overall m and a summary you gave our listeners. This podcast alone resonates with many practice owners as well as healthcare leaders, giving them a better understanding and color rather than some of the gray area we are seeing, but most importantly, alleviating some of the worry for the upcoming months in 2023. So thank you both so much.
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