The physical therapy mergers and acquisitions market is experiencing some meteoric movement. The tumultuousness of the previous financial year has paved the way for clinic owners to sell their practice—or snap up one of their competitors. But entering the world of M&A without prior experience can be incredibly intimidating—and feel like you’re trying to break into a closed-circle environment. That’s why Paul Martin, MPT, CBI, M&AMI, Founder and President of Martin Healthcare Advisors, and our very own Heidi Jannenga, PT, DPT, ATC, joined forces to talk all things M&A during the last installment of our Ascend webinar series—and disseminate the knowledge you need to successfully merge your business (or acquire a new one)!
During the presentation, we received a plethora of questions—and we shared the most common ones here! Come check ‘em out!
What is an expected EBITDA multiple for a PT business? And where do you see these multiples heading in the next six to 18 months?
There’s a wide range of multiples that you could potentially see for a PT business—and that’s due to a variety of factors (e.g., the size of an organization, market price changes, increased regulation). Ultimately, Martin says, multiples are largely dictated by risk. When you sell for as low as three to four multiples, there’s higher risk—and per Martin, he’s seeing multiples growing in M&A deals. Multiples of seven are now multiples of eight. Nine pushed to a ten—and so on. He believes that trend will continue for a while.
Is there a different strategy when you’re selling to a physician or a smaller entity?
If your physical therapy clinic has excellent metrics, Martin thinks that selling to a smaller entity wouldn’t be as strategically beneficial as selling to a larger company—and that’s if you can find a smaller entity to sell to in the first place. It’s not common to see smaller companies act as acquirors; they usually opt for a merger, instead.
At the end of the day, Martin thinks that M&A strategy should revolve more around your personal wants: What do you want out of a deal? Do you want to sell your company and do something different—or do you want to stay on board as an operator with influence? Some buyers will be more equipped to help you reach your goals than others.
If a sale process involves seller financing for under $500,000, what is the current standard for the loan? Does five years fully amortized at 7.0% sound accurate?
Yes! According to Martin, the range should be between 4% to 10% for seller financing—so this is right in the ballpark.
I receive acquisition inquiries a couple times a month. How do I know who I can trust, and what risks do I take responding to these types of requests?
Martin assures that there is no harm in talking. However, you should not sign an NDA nor should you give them any operational or financial information. If you do want a full understanding of what acquirers are best suited for your business, give Martin’s team a call!
How do we appraise the value of our therapy businesses? And how can we improve this value—and our EBITDA?
How do you appraise your therapy business? Very carefully. Firstly, remember that an appraisal is different from a valuation. A good rule of thumb to distinguish both is to think of tangible assets (e.g., inventory and assets) as things that can be appraised, and intangible assets (e.g., trademarks, contracts, customer lists, employees, reputation) as things that are valued. To determine the overall value or your practice, it’s important to review both your tangible and intangible assets—which will all tie back to your EBITDA. For a deeper look into increasing your valuation—and gaining a deeper understanding of the role a healthy EBITDA margin plays in this—check out this blog post.
Martin also mentioned that it’s important to consider the risk inherent in your business. If there’s higher risk in acquiring your practice, organizations will pay a lower multiple. If there’s less risk, they’ll pay a higher multiple.
How do you find someone to purchase your business?
According to Martin, it’s all about finding an advisor that knows all of the “real” acquirers are in the industry—something that he and his team would be more than happy to help you with!
Are more M&A deals executed during a specific time of the year? Is there a “hot” season for acquisition?
Yes! Per Martin, M&A transactions are most often completed toward the end of the year, in the fourth quarter.
How can I find a solid business advisor to help me through the M&A process?
Personally, we are big fans of Paul Martin and his healthcare advisory business. But generally speaking, make sure your advisor understands the PT industry. It’s important that they understand your business, your buyers, and the intricacies of providing healthcare (e.g., what productivity and billing looks like). All of this will come into play during the transaction, and you’re more likely to forge the best deal possible with a team that is comfortable navigating both the world of M&A investment and the world of PT.
Also, understand who your advisor is working for. If you partner with an advisor who’s representing an acquiror, they’ll be looking out for the needs of the investor—not yours. Find a firm that’s professional and completely aligns with you.
How are fees paid or calculated for advisors assisting in the M&A market?
Per this article from consulting firm CCD Partners, advisor fees are usually “a percentage of the enterprise value (EV) of the company sold.” In other words, the bigger the deal, the smaller the percentage that will go to the advisor. A deal up to $10 million will often see a fee of larger than 5% whereas a deal upward of $1 billion will see a fee of just 0.5–1.5%.
We are a two-office practice that feels strongly about our workplace culture—and I doubt we should sell to an equity firm. If we sell to a physician or another smaller entity, will we have to accept a smaller sale?
At the end of the day, it depends on what you want out of this deal. It is possible to find cultural alignments among both smaller and larger sellers—but you may have to spend time looking for that ideal partner. You must also consider what you want out of this sale. Do you want to cash out and ride into the sunset, or stay on as an operator? Knowing your needs will help you navigate the vetting process as you determine if an organization is a good fit.
Are any acquirers interested in boutique practices that only see one patient every 45 min?
The general answer to this is yes. In fact, Martin’s company has worked with many companies that only see one patient every 45 minutes. However, with this model, acquirer interest will fluctuate depending on whether you’re generating enough cash flow to replace the owner’s salary.
What are some examples of the structure in an M&A deal?
As Martin touched upon during the webinar, the best kind of structure for an M&A deal contains “elements of security and opportunity.” For these reasons, the most common structure examples include:
- Equity sales involving a buyer acquiring the seller’s equity, making the seller a wholly-owned subsidiary;
- Asset sales involving the buyer’s purchase of individual assets and ownership of certain liabilities of the seller; or
- A statutory merger involving two or more companies that merge into one company.
Each structure has its benefits and drawbacks depending on whether you are the buyer or seller: The asset M&A structure is considered more favorable to buyers—whereas the equity-sale structure is often preferred by sellers. To determine which structure best fits your needs, evaluate how each structure aligns with your end goal.
Do you classify small, medium, and large practices by dollar volume?
Yes—or by the number of clinics in an organization. This isn’t a hard-and-fast industry rule, but to Martin’s organization, a small practice generally consists of three clinics or less with $1 million or less in revenue. Medium practices typically consist of four to 20 clinics with $1 million to $10 million in revenue. And large practices typically consist of more than 20 clinics, with more than $10 million in revenue.
Is there anything different about fire sales (e.g., when the owner is ill or ready to retire ASAP)?
Aside from the circumstances behind why the sale is occurring, the biggest difference between these transactions and other more methodical M&A transactions, is that they can be rushed, and they usually don’t have the same type of multiples as more traditional M&A deals.
What are some of the specific risks that M&A companies look at?
Per Martin, the first risk that M&A companies consider is the size of your business, as there’s typically less risk in larger companies than in smaller ones. They also consider the risk of getting referrals from physicians as opposed to getting referrals from patients—and they look at your payer structure and calculate payer risk as well. But most importantly, Martin says that the biggest risk factor that these M&A companies consider is your overall market risk. These acquirers have a ton of info on the local markets that they’re dabbling in—and their decisions are influenced by who’s in the market (e.g., big competitors) and how the market is performing in general.
Regarding the case study presented during the webinar, how much did the acquirors want the owner on board vs. the cash flow from her company?
In that merger and acquisition example, the acquirors likely looked at many different factors when they considered acquiring her company. They definitely looked at the equity of the company and its potential for growth—but they also certainly considered how personnel factored into the success of the business. Per Jannenga, great leaders who know the regional or local business (and who have some degree of notoriety) add value to an organization, and are generally desirable to acquirors. Cash flow and EBITDA add to the overall value of an organization, but the people—especially the leaders—in your organization add to the overall sale.
What’s the scoop on earnouts?
Earnouts are optional features of M&A deals that “[provide] for contingent additional payments from a buyer of a company to the seller’s shareholders. Earnouts are typically ‘earned’ if the business acquired meets certain financial or other milestones after the acquisition is closed.” According to Martin, earnouts were more popular in the 80s and 90s, but lost popularity as time went on. By 2012, “we saw few—if any—earnouts.” Now, because of the effects of the pandemic, earnouts are once again becoming more commonplace. This is because business valuations may have occurred prior to the pandemic, during the pandemic, or even now, as the market still fluctuates. Acquirors are asking for earnout deals to cushion the risk of investing in a business at this point in time.
Martin says that earnouts are not to be feared. At his consulting company, he has observed that most earnouts are fair and reasonable deals that deserve consideration.
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