M&A Secrets: 7 Myths About Selling Your Physical Therapy Practice

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Perspectives from a practice owner turned mergers and acquisitions advisor

By Steve Stalzer, PT, MBA

In the world of mergers and acquisitions (M&A) there is a lot of hearsay, and the facts are often difficult to unravel from myths. This article’s intent is to provide some guidance to dispel the secrets of M&A, so the process is accessible for all practice owners.

MYTH #1:

I know what my practice is worth. My accountant/friend/financial advisor told me what it is worth five years ago. There are several logical ways to value a business but applying the wrong methodology to valuing your practice can be a huge mistake. Common mistakes include valuing a practice based on:

  1. Multiple on annual revenue
  2. Multiple on the three-year earnings before interest, taxes, depreciation, and amortization (EBITDA) average
  3. A multiple on sellers’ discretionary earnings.

While those methods may be appropriate for other industries, physical therapy practices are generally valued by applying a market-based multiple to the Trailing Twelve Months Adjusted EBITDA. While this is relatively simple, it requires an understanding of commonly accepted adjustments and even more importantly a current pulse on market-based multiples. Because 90% of physical therapy transaction details are not publicly available, advisors who specialize in physical therapy transactions and are familiar with recent trends are the ideal resource to accurately value your practice.

MYTH #2:

The buyers and brokers are saying I need to sell now. They all tell me the door is about to close!

Unfortunately, some buyers and brokers leverage “fear of loss” as a primary marketing strategy and prey on the latest reason the “door is about to close” or insist values are about to plummet. These individuals likely have their best interests in mind more than yours. The reality is multiples have risen over the past several years despite this message that the sky is about to fall. With that in mind, interest rates are rising from unprecedented low rates. If you are nearing an exit, you may be wise to consider a transaction sooner than later. If “your timeline” is more than a few years away, don’t let the fear of loss message rush you into a sale. The physical therapy industry has a bright future, and it is hard to imagine the demand for strong physical therapy practices going away anytime soon.

MYTH #3:

My advisor said there is no cost to me. He said the buyer pays their fees.

An advisor that does not disclose their fees, or worst yet, advertises they are paid by the buyer can create a conflict of interest. Advisors making this claim may not bring in buyers who are not willing to pay the broker’s fee. Sellers also risk not being aligned with the advisor with the same the goal of optimizing practice value since the buyer is paying their bill. Those brokers may also advertise, “They represent buyers who are paying above-market rates.” Like most realtors, M&A advisors are generally paid a success fee or percentage of the total enterprise value at closing. This aligns the advisor with your interests in achieving a fair and competitive value for your practice.

A good advisor will more than pay for their fee in the services they provide and by helping you get the best deal with the best partner. Speak with several advisors before committing to the first person you speak with.

MYTH #4:

I want to sell for the most I can so that I can exit immediately and not work for someone else.

Most buyers/partners are looking for proven leadership to remain engaged for two to three years or so to ensure the practice does not take a backward step following a transaction. An immediate exit requires finding the right buyer. It may scare some buyers off and may lower the value for others. A better strategy is to enter a partnership knowing that you will spend a few years helping with the transition and finding a partner that you will enjoy working with.

MYTH #5:

I have a strong Number 2 that will run the practice after I sell. They don’t know it yet.

Too often an owner’s succession plan falls apart with a key director departing just before the owner plans to sell the practice. If you do anticipate stepping away immediately following the transaction, make sure you have an engaged and aligned leadership team that has an incentive to stay engaged after you sell. Ensure you have proven leadership — not just people with potential to step up. Bringing on a minority partner can enhance value and mitigate risk for the buyer in some situations.

MYTH #6:

Selling a business is just like selling a house and I have sold several of those.

Selling a business is a big undertaking, even more so than it was 10-15 years ago. Pulling “comps,” listing it on the MLS, and running an open house or two simply does not apply. The difference between a successful transaction and just getting the deal done can result in leaving huge dollars on the table or even worse, a failed transaction. A good advisor will help the practice owner with the following:

  • Ensure you are prepared for all aspects of the transaction including assessment of practice value, clarifying owner goals, verifying financial reports, ensuring compliance preparedness, and preparation for due diligence
  • Review and discuss qualified buyers with you
  • Market the practice to qualified buyers
  • Schedule management calls and meetings that will allow you to compare partners in a short period
  • Manage offers to ensure that buyers being competitive
  • Negotiate LOI details to ensure enterprise value, working capital, escrow amounts, and other details are fair and advantageous
  • Ensure you get the best offer from the best partner
  • Manage due diligence and ensure a successful closing

MYTH #7:

For Sale by Owner will help me avoid the fees of an advisor.

A good advisor will more than pay for their fee by getting you higher value for your practice than you would get working alone. Interview multiple advisors and request the following information:

  • Who are the members of the team you will be working with?
  • What is their experience in the physical therapy industry?
  • What is the return on investment for past sellers they have represented?
  • How many clients do they take at any given time?
  • Ask to speak with past clients.

A good advisor will ensure a successful transaction. A great one will guide you successfully through the entire journey to ensure you achieve the most successful transaction and transition possible.

If you are considering selling your practice soon, make sure you spend the time to get an accurate valuation, evaluate your personal goals for selling and what type of partner you are looking for, evaluate and grow your leadership team as needed, and evaluate advisors who can help you through the process. Don’t fall victim to the myths that can leave your frustrated, rushed, and uncomfortable with the sales process.

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Steve Stalzer, PT, MBA

Steve Stalzer, PT, MBA is an active APTA Private Practice member and advisor at 8150 Advisors. Steve can be reached at steve@8150advisors.com.

Copyright © 2018, Private Practice Section of the American Physical Therapy Association. All Rights Reserved.

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