By Tannus Quatre, PT, MBA
Health care has roots in tradition and authority. Medical providers—experts in the human condition—have long been put on pedestals by those they serve out of respect and reverence for their knowledge.
While there is nothing fundamentally wrong with a relationship built on respect and admiration, some believe that the inherent imbalance of power between the provider and patient has perverted basic market influences such as customer choice, price transparency, and competition.
As consumers bear increasing financial responsibility for their care, a shift is occurring in which consumers are becoming more discriminating with regard to choice of provider. This shift is coming as a shock to many providers entrenched in the health care paradigm of yesterday.
Acknowledging this shift and responding to it with an approach to a market that views consumers not as patients (old paradigm) but rather as customers (new paradigm) will allow providers to continue to evolve our profession in a way that serves new demands as they come our way.
Tannus Quatre, PT, MBA, ATC, CSCS, lives at the intersection of physical therapy and entrepreneurship, spending his time helping physical therapists build and operate successful practices through his company, Vantage Clinical Solutions. He specializes in marketing, finance, and business planning, and authors and speaks regularly for the APTA and PPS. He can be reached at firstname.lastname@example.org.
Mark A. Anderson, PT, is president and founder of Mountain Land Rehabilitation in Salt Lake City, Utah. He can be reached at email@example.com.
Mountain Land Rehabilitation includes Mountain Land Physical Therapy, Brighton Rehabilitation, Western Rehabilitation Health Network, and Mountain Land Rehabilitation Home Health with 32 outpatient clinic locations, six hospital contracts, 49 skilled nursing facility contracts, two home health agencies and 60 home health contracts, and 950 full- and part-time employees. The practice was founded 29 years ago.
Most influential person who enhanced your professional career and why: The most influential person in my professional career was my grandfather. Growing up next door to him, I spent considerable time with him as he ran his small business. He taught me not to be afraid of taking risks and to work hard. He also taught me the “Golden Rule—to always consider what is best for others as you do business with them.”
Describe the flow of your average day and when or if you still treat patients, perform management tasks, answer emails, and market: My career path has led me out of clinical practice and into various management roles within our organization. As president, my primary role is to develop and implement the organization’s strategies. I am involved in business development, market forecasting, and business relations. I am involved in state and federal government affairs, with focus on health care regulation and legislation.
Describe your essential business philosophy: Promote our vision and core values throughout the organization. I place great value on my partners, our employees, and our patients. Everything we do should assist all stakeholders to achieve their greatest potential.
What have been your best, worst, and toughest decisions? Hiring the right people for the team is the most important decision we make. Finding exceptional people who share our values and are passionate about our profession is paramount in achieving success.
How did you get your start in private practice? In 1984, I opened an outpatient practice in Park City, Utah. I practiced out of an old house with the waiting room in the front room and hydrotherapy in the kitchen. It was a lot of fun.
How do you stay ahead of the competition? I strongly believe in an abundance mentality. Over the years, I have gone to great lengths to work with and collaborate with our competition. From forming therapy networks to establishing study groups, I have never regretted building rapport. I was taught many years ago by my first physical therapist employer that having an exceptional therapist open up an office down the street is actually a positive, not a negative. High quality, ethical competition is good for everyone.
What are the benefits of PPS membership to your practice? I have been going to PPS conferences for as long as I have been practicing. I owe much of my understanding of the business side of physical therapy to my peers in the PPS. I always come away from PPS fall conference with many new pearls of wisdom. I also have gained countless friends and resources within the membership of PPS.
What is your life motto? Make work fun, and it is no longer work. One of our core values is “have fun.” I believe I am the champion of this core value.
What worries you about the future of private practice/what you are optimistic about? I am concerned that payors may lose perspective of the value and worth of physical therapy. Unscrupulous business practices and referral for profit scenarios tarnish our reputation.
I am optimistic for the growing need for physical therapy care for an aging population. We are the cost-effective alternative to promote independence and function within this population.
What new opportunities do you plan to pursue in the next year? We are building expertise in several niche areas. We believe that diversifying from third-party paid services is an important element of our future success. We also are on a quest for standardizing our outcome and electronic medical record data collection to better prepare for case rate reimbursement and affordable care organization collaboration opportunities.
By Angela Wilson Pennisi, PT, MS, OCS
Have you spent the last few years feeling like the deck is stacked against you in this post-Affordable Care Act era? As a parent of teenagers, I am always surprised by the correlations to be found between parenting and managing my clinic. Both of my sons have played tennis casually since they were children. When my older son started high school last year, joining the tennis team seemed like a natural fit. In preparation, he had begun playing more frequently and participated in some group lessons over the winter. He had a fun season this past spring and learned a lot.
This summer, his coach suggested an advanced training camp, hosted by our local university. With the popularity of competitive sports for children, I am sure many of you can relate to the premium prices these camps command. I signed him up, including a little lecture on how he needed to set aside lots of time to practice over the summer to make it worthwhile.
The first day of camp arrived, but instead of my son coming home to tell me how much he had learned and how excited he was, he was texting me to tell me how it was overcrowded and that he was playing with elementary school children. He was so unhappy that he asked me to talk to the camp director and ask for a refund. Remembering the waiver signed at registration, I knew the likelihood of obtaining a refund was slim, but I contacted the camp to let them know my son was not having a good experience and was not placed in an age-appropriate group.
The camp director called me that evening to follow up and essentially admitted that he had not realized that my son (height, 5’0″) was 15 years old. He was vague about my son’s skill level, but said that he would try him in the advanced group the next day. Taking advantage of this parenting moment, I let my son know the outcome and that he had better have a good night’s sleep and arrive at camp the next day with a fire in his belly to demonstrate that he belonged in the advanced group.
Happily, he was thrilled with his experience the next day and said that he had so much fun, he could not stop thinking about tennis after the camp was over for the day. He chastised me for suggesting he might not be up to the demands of the advanced group and told me how nervous he had been that morning. However, in the end the little guy held his own, surprised those who had underestimated him (including me!), and experienced success.
Is your practice the underdog in your community? Are your competitors underestimating you? Are you underestimating yourself? Can you take advantage of the element of surprise to finish with a strong fourth quarter and use the fire in your belly to prepare for your best year ever in 2015? Just like my son’s tennis game—you have the fundamental skills and preparation. How can you leverage them to compete with the big boys?
By Franklin J. Rooks Jr, PT, MBA, Esq
At some point, practice owners inevitably think about what is next after private practice and start planning for retirement. It also may make sense for the private practice owner to think about pre-retirement plan- ning. While the private practice owner may not be ready to retire, he or she may want to consider options for exiting the ownership of the practice while continuing to work for the practice. In this regard, the owner is not retiring, but instead monetizes the practice by “taking some chips off the table.” It is pre-retirement in the sense that the owner continues to work—albeit under new ownership—and is able to invest sale proceeds to further achieve future retirement financial goals. The private practice must be a saleable asset—but is it? What do you have to sell? Some practice owners have been met with a rude awakening when they realize that they do not have anything to sell. That is, what they have built is not of value to any would-be buyer. As many practitioners have come to see, there is a tremendous distinction in the creation of a job versus the creation of a business.
Many private practitioners have outstanding clinical expertise and provide exceptional care, but that alone does not create a business. Many practitioners have been able to set up shop, design their own hours, control their vacation times, answer to themselves, and practice physical therapy the way they want. They are their own boss. Unless there is a significant earnings number created in the process, the
private practitioner has succeeded in creating a job for him/ herself. Instead of working for a hospital or other entity, the practitioner has chosen to work for him/herself. This is laud- able, but not worthy of any financial consideration as part of any value-added transaction. Acquirers are not purchasing jobs, they are purchasing businesses.
Who’s Buying What
The physical therapy market has been active recently with a number of mergers and acquisitions taking place. Some of the acquisitions are strategic; others are financial. In a strategic acquisition, an entity that is already entrenched in the physical therapy space purchases a physical therapy practice that fits into its overall growth plan, making it a “strategic” fit. The purchaser is considered to be a “strategic buyer.” In some cases, a strategic buyer is a competitor of the target company. Other times, the strategic buyer is not a competitor in the target’s geographic marketplace, but wants to enter the region. The overall goal of a strategic buyer is to make a synergistic acquisition that fits within the acquirer’s growth strategy. Although, a financial buyer is generally one without any investments in the industry in which the target company is situated. A financial buyer looks at the metrics of the company—cash flow, return on equity, management sta- tistics—with the goal of increasing the financial performance of the target company.
These buyers typically determine the target company’s earnings, termed EBITDA. “EBITDA” is the acronym for earnings before interest, taxes, depreciation, and amorti- zation. This is a standardized measure used by buyers to assess the target company’s financial performance. The cal- culation subtracts the company’s revenue from its expenses, but the expense calculation excludes taxes, interest, depreci- ation, and amortization. The measure is intended to insulate the target company’s value from accounting treatments and accounting elections it may have made. EBITDA may be supplemented by certain add-backs, which serve to increase the EBITDA. Many times, add-backs are those expenses that are not required to run the company or those expenses that would not exist but for the current owners operation of the company. Examples may be the add-back of the owner’s automobile expenses to EBITDA, adding back any excess compensation or even the cost of tickets for sporting events that are not exclusively used for the business. These add-backs result in a higher EBITDA. Just as there may be add-backs that favor the seller, there can also be negative adjustments to EBITDA. For example, if the target company is under-insured and obtaining proper insurance results in a material expense, the application of that expense could lower EBITDA. Making positive and negative changes to the practice’s earnings produces an adjusted EBITDA.
Once the adjusted EBITDA is determined, the target company value is determined by using a multiplier. The multiple of EBITDA provides the enterprise value. For example, if the company has EBITDA of $750,000, and the multiplier is 4.5, the enterprise value is $3,375,000. Many factors influence the multiple. The buyer’s risk and the industry’s ability to grow are predominant factors. There are also “deal specific” factors that may come into play. Strate- gic buyers may pay a higher multiple than financial buyers. With respect to physical therapy, buyers may consider the following: How many clinical locations does the target company have? Does the target company have locations in more than one state? Is the EBITDA above or below a million dollars? This is not an exhaustive list. However, at the end of the day, you need to have EBITDA. EBITDA is typically the basis of any valuation.
Is There Enough EBITDA?
Simply put, EBITDA is what is left over after all expenses. For the solo practitioner, if all of the practice’s earnings are paid out in salary, an adjustment is made based on what the market compensation is for a person functioning at owner’s capacity. That is, if the solo practitioner pays him/herself $200,000 and the market price to replace that individual is $150,000, a rough estimate of the EBITDA is around $50,000. An EBITDA multiple of 5.0 would translate into an enterprise value of $250,000. Upon any sale, these proceeds would flow to the seller net of any debt that the practice has. If the prac- tice had $50,000 of debt, the proceeds to the seller would be $200,000. If a broker was used in the sale, there would likely be transaction costs. And, of course, the sale would be subject to federal and state tax. On the other side of the equation, there is a tipping point for which the sale does or does not make economic sense. Buyers in all transactions conduct due diligence on the entity that may be purchased. Getting the deal across the finish line requires accountants who assess the quality of earnings and lawyers who draft transaction documents and finalize the sale. All of this involves expense. The value proposition must be such that the deal makes eco- nomic sense. EBITDA of $50,000 may be too small. However, there is a point—which is buyer-specific—that determines whether or not to entertain the transaction.
Think about your exit strategy. Take a critical look at your business. As you plan for retirement at some point in the future, does your practice represent an asset that you can monetize? Does your perceived value of your practice mesh with realities of the market? What have you created? Your EBITDA is a great indicator of whether you have created a job for yourself or whether you have created a business.
Franklin J. Rooks Jr, PT, MBA, Esq, is a physical therapist and practicing attorney in Philadelphia. He was a founding partner of PRO Physical Therapy in Wilmington, Delaware. He can be contacted at firstname.lastname@example.org.
By C. Jason Richardson, PT, DPT, OCS, COMT
Early in my career, I often viewed our competition as the “enemy” and believed that engaging them in collegial talks would conflict with our respective strategic plans or that the discussions would lead to revealing our “secret sauce.” Many of you may hold a similar view. Seeing the competition as the “enemy” means leaders with similar day-to-day challenges have little to no contact or collaboration with each other. Ultimately, this view will significantly limit your ability to evolve your business.
While certain strategic components of your business should remain under wraps, non competitive communication can lead to operational improvements, best practices, and personal growth.
Recently, I met a large competitor when I traveled through their town. My initial conversation with this executive was over the phone, and I followed up our conversation with a calendar invitation. I told him I wanted to discuss global changes related to regulatory and payment trends, general operational structure, and how they were leveraging technology to enhance patient experiences within their physical therapy practice—as well as put a face with the name.
While this practice executive was a bit guarded early in our meeting, these walls quickly came down once I demonstrated a willingness to discuss my perspective. During the meeting, we established a rapport and by its conclusion, we had generated new ideas on operational tasks that we each could implement to enhance our practices. To date, we both periodically speak with one another and have committed to catching up in person a few times a year.
In conclusion, we need to be open to engage with our competitors and meet with them periodically. Not to exchange business secrets, but to learn from one another and collaborate on issues that mutually align. Taking this initiative will enhance your knowledge, expand your point of view, and inspire new ideas. You may even make a new friend.
C. Jason Richardson, PT, DPT, OCS, COMT, is a PPS member and the vice president of clinical operations for Results Physiotherapy in Franklin, Tennessee. He can be reached at email@example.com.