In our last post, we discussed advice from top industry experts, Paul Welk, Greg Wappett, and Eric Major regarding selling your practice. They offered insights into the process from the viewpoints of an attorney and financial advisors, respectively.
Key points we touched on include understanding your earnings, variables that affect the rate of your multiple, and how to find the right buyer.
Today, we’ll round out your team of experts with advice from Steve Mountain, Thomas Carden, and Chris Reading. They each bring a unique perspective on the topic from the roles of a president of a consulting company, senior managing director of mergers and acquisitions, and CEO of a PT company.
We’ll start with Steve Mountain.
Advice From Steve Mountain
Steve Mountain is the Founder and President of MT Consulting.
Beginning the Merger and Acquisition Process
First and foremost, remember that this is a difficult process. This is a huge physical task, and you must be willing to do your due diligence. It’s common for people to underestimate the amount of work that’s necessary, so don’t be alarmed if you find yourself a bit overwhelmed.
Emotion is a normal part of this process. You may find yourself excited at the beginning, overwhelmed shortly after, elated for securing a buyer, and even a bit depressed if a deal falls through. Expect an emotional roller coaster and learn to hang on through the ups and downs.
Remaining organized and accurate will help keep you moving forward through the process, despite inevitable bumps in the road.
What Is Your Goal?
Steve’s next bit of information is that you should always know what you’re trying to accomplish.
What is YOUR personal end goal in selling your practice / business? A few common objectives are:
- Make lots of money and completely check out from the business
- Willing to work hard and stay involved in the business
While the first option might seem enticing, the second option is much more valuable to the potential buyer and is thus the more favorable choice.
Intangibles
Once you’ve recognized what your goal for selling is, it helps to have an idea of the intangible factors that go into the process.
For instance, the mindset change from your company turning into another is not simple or easy.
However, if you decide to use an advisor, understand that it is their job to find capable buyers. Knowing you have a capable buyer coming in should help ease your worry throughout the transition.
To attract capable buyers, you need to first realize that there are several types of buyers. It’s important to understand what the different types are and to talk to more than one. We touched on this in part one of the series if you need more information on which buyer is most appropriate for your business! (link to part one here).
Despite which type you work with, it’s safe to say that very few will have a desire to fix things when they are looking to purchase a business. This includes problems from physical shortcomings, to underperforming employees.
Taking care of problems as they arise and having an expert in each position in the clinic can help attract buyers by showing them you’ve created a reliable, well-managed business.
Recent Trends
According to Steve, there are a few recent trends that can have a big impact to sell your practice or business.
The value of private practices has increased due to more private equity coming into the marketplace. Multiples are higher than they’ve ever been, which while inherently a good thing, does not come without complications.
More private equity has also led to multiple levels within private equity groups. For example, while previously you may have only dealt with another PT, you’ll now be dealing with a private equity firm, the bank, and the operator who knows the business.
Another recent trend is an increase in the financial mindset coming into the marketplace. This means the level of invasiveness and analysis by people who don’t necessarily understand PT specifics (think Medicare guidelines) is on the rise.
Steve’s recommendation for this is to find a capable and competent advisor throughout the process who understands the specifics of the language being used.
Advice From Thomas Carden
Our next expert is Thomas P. Carden, the Senior Managing Director of Mergers and Acquisitions with Martin Healthcare Advisors.
Thomas suggests that, for a successful merger or sale of your private practice, there are three pivotal steps to undergo.
3 Steps For a Successful Merger or Sale
Professional Business Assessment
A potential buyer will want to have a complete understanding of your practice. This includes in-house operations, patient care, payer mix, and referral generation.
In order to provide this information, there are some important questions you must first ask yourself, such as:
- Are we providing the best care?
- Are we getting paid?
- What is our payer mix and reimbursement rate for our area?
- Do we compare to others in the region or nationally?
- What is our one, three, and five-year subbing plan?
- How much do I need to retire, and how do I get there?
Valuation
We’ve previously discussed EBITDA and the importance of this value in determining how much your practice is worth.
You must calculate EBITDA for your business, as well as understand the composition of it. Are you primarily cash-based? Insurance-based? Somewhere in the middle?
Once your EBITDA is established, you have to then determine if it is sustainable. For instance:
Are you averaging a reasonable number of visits for a new patient, with well-supported therapist documentation? If so, this would be considered a sustainable EBITDA.
Additionally, you must consider your capitalization rate (cap rate), which shows the potential rate of return for your business. It should be about equal to the inverse of your multiple. So if you have a multiple of 12, your cap rate would be 8%. As the seller of your practice, the lower your cap rate is, the higher your selling price can be.
By putting all of this information together you’ll be able to determine if your business if declining or climbing.
Control The Variables You Can
- What are your reimbursement rates?
- What does the labor market look like in your area?
- How are you compensating for referral sources drying up?
You need to be able to show that you are able to grow in spite of challenges that are presented along the way.
A Note on Mergers
There will be different valuations when exchanging stock due to the different multiples of each company involved.
For example:
Company A is a $5 million company with multiple of 10, making them worth $50 million.
Company B is a $1 million company with a multiple of 5, making them worth $5 million.
If they merge, the earnings of the company are now $6 million, with a value of $55 million.
Since Company B only contributes $5 million to that total, they are worth 1/6th of the total earnings, but only 1/11th or 9% of the value of the larger company.
The bottom line here is that earnings are not equal for different sized companies when considering a merger.
Other considerations are who’s going to be in control once the process is complete, and geographical decisions based on areas that may be declining or barely profiting.
Historical Timing
Historically, the market for Private Practice PT is stronger than it’s ever been, but that doesn’t make it easy. You must put in your due diligence, have your financial statements in order, be organized, and most importantly, be careful during this process. Understanding the deal structure and adhering to sound advice are definitely your best bet.
Think of it like buying a new house… You’re going to get the best realtor, use a professionally-designed process list, and have a well laid out deal structure in place before you even consider selling your home. The same concept should be applied to your practice.
Closing Insights From Thomas
It’s a competitive market out there. Do yourself a favor and hire a professional firm who understands outpatient physical therapy, not your CPA down the street.
Advice From Chris Reading
Chris Reading is the CEO of U.S. Physical Therapy, Inc.
Chris’ company has opened hundreds of new clinics across the US, as well as performed acquisitions with a number of clinics to continue the growth of his company. He completes our panel of experts by offering advice from the viewpoint of the buyer or potential partner himself.
Perspective of a Potential Partner
Get your business ready! Remember when we said buyers don’t want to fix things? Well…it’s still true. To be ready, you need to be providing good patient care, have a team of key people already in place, and, as the owner, have availability throughout and after the transaction.
Chris’ company won’t even consider purchasing a business if the owner’s only goal is to retire. Buyers want certainty, and this means the key person steering the ship will still be around after the sale to guide it safely into harbor. Additional factors that buyers are on the lookout for are diversified payer mix and diversified referral sources.
Ideal For The Buyer
It’s much easier to become the ideal business partner if you know what buyers are looking for.
Below is a list of things included in a preferred deal structure from a buyer’s perspective:
- $1,000,000+ EBITDA
- Multiple locations
- No compliance issues
- Net rate/visit allows for profit
- Opportunity for growth in the geographic area
- Business is on a positive trajectory
- Buyer has interest in a particular market (i.e. pelvic health)
Range of Private Practices
When it comes to making a deal, size really does matter. Based on 2016 market values, a clinic with earnings of $300,000 a year would have a multiple of 3-4x. As a buyer, these figures often make it difficult to get a deal done.
In contrast, a clinic earning between $1,000,000-$3,000,000 a year with a multiple of 6-8.5x creates a much more certain deal structure for buyers to get a return on their purchase. By understanding this information, you can create a deal structure that works best for the size of your company, or if need be, get creative with the type of buyer you choose to work with.
Additional Merger and Acquisition Considerations
During this type of deal, owners typically don’t want staff to know what’s going on, however, this can make it nearly impossible to gather necessary information. You have to let key staff members know what’s happening so they can assist you in finding and organizing information buyers must have to move forward with the transaction.
At a minimum, hire a good attorney who has deal experience within the physical therapy space. Want to go beyond that? Consider the cost benefit of using a merger and acquisitions firm. It is a competitive market and having someone who understands the inner workings of it can be invaluable.
Wrapping up
During this series, we’ve learned that selling your practice is no small task. Through the insights of our experts, Paul Welk, Greg Wappett, Eric Major, Steve Mountain, Thomas Carden, and Chris Reading, we now know that it takes time, a lot of hard work, and the experience of those who have been there before to prepare your business for purchase.
Most importantly, it takes a successful business to create a successful sale. Successful selling comes down to building the right systems into your practice. If you want to get started building the right marketing & business systems, check our Resource Center.
