Private Practice Mergers & Acquisitions

Boom times for selling or raising capital.

By Ryan Buckley

Outpatient physical therapy is in the midst of a decade-long mergers and acquisitions frenzy with no signs of abating. My firm has had the benefit of a front row seat to industry consolidation, advising on a dozen sale and refinancing transactions with private practices, corporates (known as strategic buyers), and private equity investors. There neither has been a more compelling nor lucrative time in the last ten years for private practices to: (i) take chips off the table while also recapitalizing for growth with a private equity partner; (ii) pursue a full sale to a strategic buyer; or, (iii) fund an expansion through debt financing. In a sector as dynamic as physical therapy, the old adage that you are “either growing or dying” has never held truer. To their credit, private practices have responded with a ravenous appetite for outside investment.

The hunting ground is plentiful for buyers and investors. The industry has been consolidating for 10+ years, yet private practice remains immensely fragmented. The ten largest companies—two public operators and eight private equity-backed strategics—comprise just 21 percent of clinic market share (or 3,300 clinics), with no company owning more than 7 percent of clinics. Beyond the large strategic consolidators, the number of companies with more than 12 clinics approximates only 100 companies, who collectively own approximately 2,300 clinics. This market landscape results in 10,000+ clinics spread across literally thousands of private practices nationwide.

For practices interested in mergers and acquisitions, the landscape is ideal. A decade ago, sellers could look to just a handful of acquirers. Today, the amount of financing alternatives and number of potential capital partners has grown significantly. The influx of private equity into physical therapy has led to the development of over 15 new strategic buyers that are actively looking for practices to buy, both regionally and nationally. The prevalence of these PE-backed strategic consolidators—supported by favorable industry tailwinds, a stable reimbursement environment, strong operating performance, and robust debt markets—has created a uniquely attractive environment for private practice sellers. This dynamic continues to drive higher valuations, seller optionality, better deal terms and high certainty to close. Valuation, most often measured as a multiple of adjusted pre-tax earnings, has jumped upward by 25 percent to 50 percent in recent years.

For practice owners, pursuing strategic alternatives related to one’s life’s work can be daunting. In this environment, the reasons to pursue a transaction abound; yet, preparation and proper positioning are paramount to ensure an optimal and successful outcome. Hiring an experienced mergers and acquisitions advisor for guidance through the four- to six-month transaction process is often a critical step. An advisor with physical therapy experience and intimate market knowledge will ensure that a compelling investment thesis is properly crafted and communicated to credible counterparties. A good advisor will calibrate deal expectations, enhance certainty to close, and provide counsel on transaction nuances such as retained ownership versus an outright sale, employment and partnership terms, restrictive covenants in a purchase agreement, and on-going business considerations like personnel modifications, billing consolidation, and payor/reimbursement changes.

Every business eventually reaches an inflection point where a mergers and acquisitions or capital markets solution should be evaluated vis-à-vis continued expansion, long-term business building expertise, and wealth monetization. While personal seller dynamics such as age, succession planning, the need for expansion capital, and business life-cycle considerations should be contemplated, private practices should not ignore this ideal environment for outpatient physical therapy and the multitude of compelling strategic alternatives that exist currently.

Ryan Buckley Director with Livingstone, is one of the most active M&A advisors to the physical therapy industry. Livingstone is an international mid-market mergers and acquisitions and debt advisory firm based in Chicago, Illinois. Ryan can be reached at buckley@livingstonepartners.com.