It’s Not Only About Exiting… It’s About a New Beginning

New Beginnings
By Brian J. Gallagher, PT*

When owners are exiting their practice, it may be important to remind them that they are moving on to a new chapter of their life, so it’s vital that they get it right the first time. After I sold my practice in 2006 to two of my employees, I took it back in 2009, and sold it again in 2017 to a corporate buyer that was physical therapy backed. I learned a lot from both experiences.

There was a time for all of us when we started in the profession as new graduates, fresh out of school, focused on trying to become the best physical therapists we could be. Then we found ourselves in the advancement phase of our profession, trying to be the best clinical directors or senior clinicians we could be. It’s usually after this stage that we decide to take the leap out on our own and become practice owners. Like so many others, we knew we had something to offer above and beyond that of a staff therapist. Our emotions ran high, full of enthusiasm and excitement to manage our own career. We looked forward to enjoying a greater level of freedom and the ability to have a positive impact on our staff. We loved the idea of working side by side with others as we grew our practices. At this time, however, we didn’t stop to realize that the practice would be our greatest investment and ultimately our best retirement account!

There are some important factors you need to consider in order to be successful when it comes time for you to complete your succession plan. Soon enough the years go by and the practice grows and succeeds, or it may plateau and struggle. If we’re keeping it real, you’ll agree that both are potential outcomes that one might experience. A lack of good leadership, management, and marketing abilities contributes to plateauing or shrinking.

If your practice has plateaued or is on a downward spiral, evident by the fact you don’t have three years of uptrending tax returns, then you better quickly identify the specific causative factors so that you can reverse this trend before going to market. However, if you no longer want to put forth the time and effort to reverse this trend, identifying the specific causative factors will help you when it comes time to negotiate with your buyers. Some of the causative factors may be more concerning to your prospective buyers than others. For instance, a downturn resulting from you having stepped away from the practice or you having lost a large portion of your market share to a hospital system, physician-owned physical therapy practice, or a corporate/franchise physical therapy practice, will be one that they are particularly concerned with. Other causative factors such as lack of staff, marketing, or internal management of systems may be seen as an opportunity by the potential buyer to purchase your practice on a discount.

You need to understand the three types of buyers and what is important to each of them. These include: current employees, outside practice owners who are looking to grow in market share through acquisition, and corporate/franchise buyers who may or may not be backed with private equity, venture capital, or angel investors. More often than not, the internal buyer is looking to succeed you by expanding what you have started, thereby continuing your legacy. The outside practice owner is looking for synergistic practice opportunities to expand within their local market. The corporate buyers have entirely different motivations since they are beholden to their investors and stockholders; therefore, they will have very little flexibility and run a standard accounting process that fits their dogma. They are also tasked with the responsibility of hitting their margins and return on investment (ROI) for their financial backers, so be prepared for them to negotiate from that viewpoint.

Let’s bullet point some important steps you should take:

  • Your succession planning should start at least 24 months prior to when you want to close, should you go the route of selling your practice.
  • Get ahold of the due diligence list that is most commonly used by the majority of buyers; that way you can prepare yourself for what is going to be requested of you.
  • Make sure your accounting software, tax returns, and electronic medical record (EMR) financials all match. Recognize the more discrepancies that are found on the surface, the greater degree of digging will be done during the process.
  • Accurately identify the owner add-backs that you will be applying to your net revenue number so that you can have the most accurate earnings before interest, tax, depreciation and amortization (EBITDA) calculation. EBITDA is a measure of a company’s operating performance.
  • If you have only one or two offices, the most typical multiplier I find is 3.5 to 4.5 times EBITDA, largely due to revenue generation. When you have three or more offices I have seen the multiplier go up from 4.5 to as high as 9, depending on revenue, market dominance, and the economy of scale savings on centralized expenses.
  • Seeking guidance from experienced individuals who have been down this road before can prove beneficial in the long run. Six percent is the typical commission for a sales broker to help you sell your practice, but beware of who you choose because many have working relationships with the buyers as well. Make sure there aren’t behind-the-scenes conflicts of interest where getting the deal done and being paid is their major concern.
  • Understand the difference between a stock sale and an asset sale, as well as the tax implications postsale, as this will have a profound effect on what you walk away with when the deal is done.

But what if there was another option? One where you did not have to do a “one and done” deal (sale) in hopes that you make out well enough to live off of the proceeds of the sale? What if you could be like a property owner who contracts out to a property management company the responsibility to manage and grow the overall value of your asset? I call this the Management Services Organization (MSO) option. The way this option works is that you contract with an MSO that has the historical expertise of running successful physical therapy clinics. They come in and manage the day-to-day growth of your business. The MSO takes care of everything, other than the bookkeeping and accounting, which you would never want to give up anyway since these are your money lines. A property management company owner told me once that none of his clients want to deal with the taxes, tenants, and toilets so they outsource it all to us to manage, maintain, and enhance the valuation of their properties.

There are physical therapy owners who are looking for the quality of life they have always envisioned but could never get enough distance from their practice to experience. Many think their only option is to sell what they have spent their entire lives building only to give up 6 percent to a broker and another 25 to 30 percent in taxes. So, what if your succession plan was to live anywhere you wanted, do the things you most enjoy, all the while collecting mailbox income from your largest asset, without having to be there? Best of all, the practice is growing in value just waiting for you to collect when you are ready to sell. Remember you still retain 100 percent ownership, so you can sell it whenever you want.

As with anything, you should follow the three-phase decision-making process:

Phase 1. Do your research and learn all there is to know about the topic.

Phase 2. Once you are confident that you have gathered all the pertinent data, you should deliberate by evaluating the information in depth so that you can make the most informed decision possible.

Phase 3. Execute on your decision immediately following your deliberation.

A good executive is one who can observe, decide, and act on their decisions without allowing counter-intentions to get in the way and divert them from their path of acting on their successful decisions.

Brian J Gallagher

Brian J. Gallagher, PT, is the chief executive officer of MEG Business Management, LLC. With more than 24 years of experience in the field of rehabilitation and 19 years in business, he specializes in physical therapy practice billing and coaching nationwide. Brian supports the APTA through lecturing, writing articles, and performing webinars. He can be reached through his website at or via email at

*This author has a vested interest in this subject.

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