MRMA 142 - Intriguing Predictions for 2023 from a Large, National Acquirer
This week Paul speaks with Richard Leaver, CEO of Alliance Physical Therapy Partners, to hear his predictions about what the M&A Market will look like this year for Outpatient Physical Therapy. Tune in to hear what he thinks lies ahead for our industry, and who will get the best deals in 2023.
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Paul Martin
Good afternoon and welcome to another episode of Paul Martin's crucial conversation actions today. So excited. We have with us today Richard Leaver. Richard is a physical therapist and he is also the CEO of Alliance Physical Therapy Partners. Now, Richard has a long and decorated career in physical therapy, having spent time with physio, with physio Therapy Associates. EH'TAI And getting his master's degree at one of the best universities in the world, the University of Michigan. Now Alliance Beauty Partners is a private equity backed physical therapy company. They are based out of Grand Rapids, Michigan, and they currently have 16 unique brands, meaning 16 companies that they have partnered with that all are continuing to go under their unique and personal brand that they brought to the partnership. They currently have over 100 clinics and they are in 16 states. Richard, it is great to have you with us today.
Richard Leaver
It's very kind of you. Thank you, Paul. And I'm humbled to to appear on your crucial conversation. So appreciate it.
Paul Martin
Yeah. When you hear it back to you, you think, man, I've done a lot, right.
Richard Leaver
That I'm only 25 years old as well. So, yes.
Paul Martin
You've accomplished a lot in the 25 years. Wow. Well, Richard, we have not had you as a guest. And I would love to get, you know, kind of your update, State of the Union on Alliance. I know there's been a lot of changes, a lot of progress over the last year. Can you can you catch us up?
Richard Leaver
Absolutely. I say alliance is the best kept secret in the outpatient world. I don't know if it's the best kept secret, but certainly we fly under the radar. I think as an organization, we're only about six years old. But the genesis of the alliance goes back over 40 years with agility, health. So we're fairly young with a new kid on the block. I believe we kind of got a lot to prove, and we will. So we we have approximately 110 clinics at the moment, as you say, 16 brands. We also are a little bit different. We have industrial age prevention services, work fit, and also we have virtual, virtual and even custom orthotics business and the one change that I think is significant is we did change equity sponsor just over 12 months ago. So we kind of moved on to a company that's called Posse Impacto. Keith And for those that are familiar with the private equity space, they really are experts. They really are a class P business over 20 years pure health care experience. So we're we're very excited and happy to be partners with BPO.
Paul Martin
Yeah, we were we were really, really impressed when you guys announced that partnership because, as you just said, BPC is you know, again, we're seeing this in the rehab industry that some real, real strong, well-funded as well as, you know, solid thinking, private equity getting into this industry. And BPC is certainly, you know, one of the best right now.
Richard Leaver
Yes. I say it's really going from where we were as the not even the the minor leagues. We're in the lead Little League before BPC. And we we've moved into the major leagues. They bring some some really heavy firepower with them.
Paul Martin
Absolutely. Absolutely. You know, Richard, I'm sure you're getting a lot of these same questions, but we're getting a lot of questions from current prospects, our current clients. But there are three questions that seem to be at the top of this list. And just about in every discussion I have. And I'd love if you could shed some light on a couple of these questions.
Richard Leaver
Absolutely. Yeah.
Paul Martin
So first is how does your how do you see that the increase in borrowing interest rates will impact what a deal will look like from acquirers like Alliance in 2023? Looking at multiples structures, how does this impact them?
Richard Leaver
Yeah, it's really interesting. I think it's keeping it fairly simple. Multiples are going down. What we've seen really in the last six months, probably a little bit longer than that, is that for the very large entities that are going through a deal process, the multiples are probably drop down a couple of clicks and then that's going to filter down through. So I think the the value of the business is going to be perhaps a little lower for the smaller entities. When we look at look at partnering or acquiring with entities for those smaller entities. You know, one or two clinics or even five or possibly even ten, they won't see that such a dramatic drop in in multiple, but there will be some downward pressure in multiple and then obviously overall valuation. But but the fundamentals still remain strong. There is a huge amount of private equity money sitting on the sidelines that really needs to be used. So there's going to be a lot of interest in partnering and acquiring entities. There's going to be a still a lot of money out there. But I think the level of risk tolerance is a little bit less. And I think entities like Alliance and other entities is just going to be perhaps a little more selective and perhaps do a little bit more diligence with regards to to what they look at and what they eventually decide to to purchase.
Paul Martin
So maybe squeezing down on the number of deals that are done. But what I'm hearing from you is that the higher quality companies with that have significantly lower risk are the ones that are going to have the best chance at making it to the finish line. Did I point out okay or.
Richard Leaver
Yeah, absolutely. Our belief and understanding, particularly with a with a very sophisticated equity sponsor, our understanding is really inflationary, is transitory. It will come and go. And yes, at the moment it's certainly painful for a lot of people and the cost of money will will will change somewhat in the short to medium term. But but fundamentally, if you are running a successful business that is has sustainable growth and well-structured and appropriate margin, really the the macroeconomic components are somewhat noise that the essentially the what we're looking at is exactly the same, but perhaps just a little bit deeper.
Paul Martin
Yeah. Yeah. And it you know I've heard from from some companies and going to peeps this year that you know where the multiples had gone and the structures had gone was, was almost out of market. I mean it was almost, you know, unheard of some of them all. So it's going to come down maybe to reality. But as you said, the dynamics are all still there. And good deals are still out there. It may just be for the better, more prepared companies.
Richard Leaver
Absolutely. You know, there is a shortage of good entities to partner with. That's the bottom line. And there is a lot of money in a lot of entities looking to partner and acquire. So. So it's still a healthy environment. And and your point really regards to valuations, I think what one has to understand is the valuations for the last two or three years prior to kind of this this downturn, inflationary pressures were were abnormal. That wasn't really normal within the market. So what you're really seeing is a return to normality rather than necessarily depression.
Paul Martin
Yeah, yeah, yeah. Great point. Really good point. So, Richard, how has the shortage of therapists and the increased costs for therapy professional staff, how is that impacted how you look at a specific deal and how is that impacting alliance partners?
Richard Leaver
Yes, to two separate things. When we look at the deal, obviously, staffing is is a critical component in many ways. The majority of the value of the business is goodwill. Goodwill. And that goodwill is really based upon the ability to staff and maintain staffing and the appropriate level, not only appropriate levels, but really the the the longevity of those clinicians that have the relationships with the referral source. And they're able to to be what I would say, rainmakers. So if there are problems with staffing, then that will definitely raise some concerns. But the bottom line is it's it remains the same. It's all to do with revenue growth and the term and and primarily for the smaller entities, it's EBIT. So, yes, we will look at flight risk of employees and also, you know, how many perhaps clinicians there are in order to make sure that if we're going to partner, then we're not going to essentially buy an empty clinic. But really, I think from a private practice perspective, it's still maintaining huge focus on on revenue growth and maintaining margin. That's really going to be the key thing is how can you how can you change or adjust your practice in clinic in order to be able to maintain even maintain margin that's really as important as as over to overall EBIT?
Paul Martin
Sure. Sure. Yeah. And you know, the third question, maybe a little bit of a duplication, but it does seem like, you know, general inflation, not only for professional staff but for supplies, rent, etc.. You know, how will this change the ability for a business owner to successfully sell their business to a larger partner in 2023?
Richard Leaver
Yeah, as I said, I think because of the shortage of quality assets, I think it's still going to be fairly easy to find probably multiple entities that look to partner or acquire. I think it's only those practices that are struggling financially and probably struggling since COVID, to be honest, that are going to struggle to find a new acquiring entity or a partner so long as practices are still focused on the fundamental KPIs of that practice, be they operational and financial. I think I think in 2023, I think it's going to still be a great year. There's going to be a lots of deals still and hopefully the impact is going to be small on those that decide to sell in this coming 12 months.
Paul Martin
Sure. Sure. So what have been some of the biggest changes? And you know, you spoke about BPO in your introduction. What have been some of the biggest changes as it relates to how Alliance now goes through an acquisition process with PPC as compared to the prior private of the previous private equity group? Has the process changed?
Richard Leaver
Yes and no. What BPO CS allowed us to do is really given us the the resource and backing to be able to look at anything from a single practice through to a company that has over 100 clinics. Whereas before, with our prior equity sponsor, we really didn't have the firepower to be able to look at the larger, larger deals. But now we have that sophistication, credibility of associate with a much stronger PE company, as we say. So from a size perspective, it's really allowed us to enter into a different arena up our game and consider any size deal because we have access to that. And really that access is, I won't say unlimited, but certainly more freely available to us. They're just the fundamentals looking the business and how we how we go about it. It's always the same. It's really we're looking at at financials structure, the business, staffing culture. And I think culture is very often missed and forgotten because that's, I believe, really the secret sauce of whether it's going to be a successful not only deal but also successful integration.
Paul Martin
How much does BPO see drive the culture piece to that? Because, you know, there's this misnomer out there, or you can tell me maybe it's not a misnomer, but there's a lot of folks out there, you know, private equity just wants a return. Private equity just wants to buy businesses to consolidate and then get out. I mean, what is their view on how you guys will pick and choose the partners that have that cultural fit?
Richard Leaver
Yeah, You know, as you're really inferring, not all PE companies are the same. In fact, there's a vast difference. What I will say about BPO C is, you know, one of the first things they said to me is we're not operators extremely clever from a financial perspective, but they know that they're not operating solely if alliance to create the culture and the operational framework we operate in. And that's really important. And the other thing about BPC is they truly understand that, yes, the typical private equity has a lifecycle, but to really add value to a business and to really optimize and take new partners to the next level, you've got to invest very, very heavily and you've got to think long term rather than short term. So as an organization, certainly since our new equity sponsor came out, we have spent a huge amount of money investing in the infrastructure, the business, not for the next one, two years, but really for the next ten years. And that's really when one is looking to partner with. And then that's really what what the private practice needs to look at is how is the acquiring entity truly set for success? And from being able to take one's legacy of what you've built and truly take it to the next level and beyond rather than the short term perspective?
Paul Martin
Sure. Sure. And, you know, it's very interesting you say that because, you know, as you know, the typical private equity cycle is about five years. But what I'm hearing is whether PPC decides to either reinvest or to, you know, transition to another private equity group in five years, they're already planning five years beyond that. So whoever would come in would already be able to see where that's headed, which will obviously position alliance extremely well.
Richard Leaver
Absolutely. A sophisticated private equity company not only is planning five years ahead, but they're actually planning an exit even before they've acquired the entity. And not only that is they a a PE really should be flexible with regards to that timeframe as well. So again, it goes back to this idea where we are focused on building long term sustainability and growth because that's really truly where value is anyway. People are sophisticated enough and astute enough to see through short term increases in in E, but through pulling levers that really will get you to be successful in the long run.
Paul Martin
Right. Right. Absolutely. So based on, you know, all of our discussions is there and the economic conditions, etc., is there anything different that alliance is now seeking from a partner than maybe previously?
Richard Leaver
No, there's a simple answer, but I think what we are doing is we're just perhaps taking a closer look under the hood in, you know, it's a bit like properties like the property market previously, until recently, people would would buy a house on scene almost. And I think a lot of entities entered into the acquisition or partnership without truly doing the full, say, house inspection and diligence. So I think the only thing I would say is because money is becoming a little bit tighter. Risk tolerance is going down. I think just the level of diligence is going up. But what I will say is we see this as an opportunity. Then any of these headwinds, we see them as opportunities. The good companies will take this an opportunity to go out and find more partnerships, not to to hunker down. And what's been clearly shown time and time again is those entities that that are proactive during this time will come out the other side much, much stronger. And that's really what we're hoping for.
Paul Martin
Absolutely. Yeah, absolutely. You know, and and I don't wanna bring up another company while I'm talking to you, but you know, we're all familiar with USPTO and years and years ago when companies were doing all sorts of different things with the way in which they're doing acquisitions now, USPTO has just been like the steamship and as you just described, it sounds like that's the tact that you and BPC are taking now, is you're going to continue to be that steamship through the ocean and not, you know, taking all kinds of years. But we're continuing on the same path.
Richard Leaver
Yeah, I use the kind of the story of the the fable of the the tortoise and the hare. Eventually, the tortoise will win. And that's why I kind of go back to this concept of, you know, we're the best kept secret. We're secret or not not a secret, but we we are slow and steady, and that is what wins the game and provides that stability and framework for future success.
Paul Martin
Sure, sure. So put on your private practice hat for for a minute here, if you could, because I know you've been there. You've been involved in the physical therapy industry for a long time. What do you see will be some of the biggest challenges is for private practices maybe that have no interest in transitioning or partnering. What would be their biggest challenges in 2023 23?
Richard Leaver
I think it's two. Primarily that's recruitment and retention and also managing the reimbursement cost cuts. So essentially what one has to do is one has to not only continue to optimize the business, but also understand that probably they're going to have to develop or accept a lower margin. Now, that's not to say we're going to operate at the margin like a supermarket, but we can't maintain the level of margin that traditionally therapy has been operating at. I think it's understanding that obviously as a private practice owner, it's more about cash flow rather than perhaps EBIDTA. But even still, it's got to the point now with reimbursement levels where you're just going to have to be just a little more careful and perhaps run a little bit faster.
Paul Martin
Absolutely. Absolutely. Richard, this has been so enlightening and I am sure that for our listeners that they have received a lot of value as to hearing from yourself how you kind of see this world of physical therapy and what we can expect from acquirers like Alliance as well as others, and how to make it through 2023 and come out looking good in 2024. I want to really thank you for taking the time out of I'm sure, a very, very busy schedule to spend some time with us and to give our subscribers value. I really appreciate.
Richard Leaver
It. Thank you so much for the opportunity of speaking to you today, Paul And indirectly, all those that listen to your program. Thank you.
Paul Martin
Thanks again, Richard. So for all of you out there, if you have any questions on my discussion today with Richard Lever, just click below and let's talk. Thank you and have a great day.