The start of a new year typically inspires resolutions. Given the challenges of the past year those resolutions may revolve more around spending time with loved ones or contemplating the future of your therapy practice. Now on top of those challenges, as an owner of a physical therapy practice you are faced with an average reduction of 3.6% in Medicare payments effective January 1, 2021.
If the future of your therapy practice includes considering the sale of your practice then you have a lot to think about. And your top questions probably include the following:
- What is my practice worth?
- What can I do to increase the value of my practice?
- Who will buy my practice?
- How do I sell my practice?
Your Practice Worth
Cash Flow
The number one value driver for almost any business is cash flow which can also be referred to Adjusted EBITDA[1]. Cash flow is calculated by taking the annual Net Income of a practice and “adding back” certain expenses. The first of these add backs are interest expenses, corporate taxes,[2] depreciation and amortization. Other add backs could include an owner’s personal expenses not related to the operation of the busines and some extra ordinary one-time expenses.
Expenses that typically are not added back include the owner’s salary and compensation. On occasion a portion of this expense could be added back if the owner’s compensation exceeds the market rate to replace the owner. Many times owners may own the real estate in a separate legal entity and may be charging the practice rent above or below that market rate. If this is the case then there needs to be an adjustment to rent expense.
Finally, certain revenue classes may need to be backed out. These may include revenues from grants, interest income, investment income or other income not directly related to the business. The most recent revenue class that needs to be backed out is cash received from any Payroll Protection Program (PPP) loans that have been forgiven.
Practices are typically valued on a multiple of cash flow. Most buyers will not look just at the current year’s cash flow and will usually base the multiple on an average of the most current three years. Many factors including key metrics and market place differentiation determine that multiple. What the current multiples are for physical therapy practices will be discussed later in this article.
Key Metrics
Beyond cash flow there are a number of other driving factors that influence the value of a practice. Those include the following:
- Number of new patients per year
- Visits per patient
- Payor mix and average income per patient
- Space and staff utilization
For a practice that meets or exceeds industry averages the multiples certainly will be higher than an underperforming practice. Certainly the higher the number of new patients per year is important, but equally important is the number of new patients is growing year over year. An upward trend increases the multiple while a flat or declining trend decreases the multiple.
Is your practice maximizing the number of visits per patient based on the patient’s condition? While overutilization is not encouraged proper utilization is important. Practices that provide the proper number of visits per patient could help increase the multiple.
Payor mix and average income per patient can be key metrics to help drive the value of a practice. For outpatient Physical Therapy the average Medicare payor mix is 28%. The national average payment per visit based on a 4 unit visit is $96. Keeping a practice’s Medicare payor mix below the national average and exceeding the national average payment per visit are value drivers.
Finally, how well does your practice utilize space and staff? What is your ratio of staff to square footage? Do you have under-utilized space that is not generating revenue? How many visits does your practice perform per full-time equivalent (FTE)? Could staff be more productive without negatively effecting quality? A good benchmark for staff utilization is 46 visits per week per clinician. Efficient utilization of space and staff are value drivers.
Market Differentiation
What distinguishes your practice from the competition? Don’t answer “the best quality”. Do you know any practice that does not believe that they provide the best quality? No one promotes themselves as just ok or subpar.
So what is it that makes you different or unique?
- Profitability with revenues trending upward
- Payor Mix
- Cash based services
- Low Accounts Receivable greater than 30 days
- Opportunities for growth
- EMR platform
- A large physician referral base that is wide and diverse
- Direct to consumer marketing
- Key, highly qualified, long term staff with low turnover
- Non-compete agreements
- Desirable locations
- Multiple locations
- Number of years in business
- Recognizable brand
- Debt Free
- Owner’s willingness to remain with the practice for a period of 12 to 24 months
As anyone can see there is not a “one size fits all” when determining an appropriate multiple range for a Physical Therapy practice. All of the factors previously mentioned are part of the equation along with the market’s appetite for acquisitions. Here is what has been seen with recent multiples.
Cash Flow or Adjusted EBITDA | Multiple Range |
| $300,000 or less | 3 to 4 times |
| $500,000 | 5 to 6 times |
| $1,000,000 | 8 to 10 times |
| Greater than $1,000,000 | Could be higher |
How to Increase Practice Value
You have completed an initial evaluation of your practice and the current value does not meet your future financial needs. So what is next? The answer is for the next 24 months work harder in the practice than you ever have.
- Increase referral sources and referrals
- Control your payor mix
- Focus on new non-Medicare patients
- Know who is the best payor (insurance company) in your market
- Know who are the top 3 employers with that insurance company
- Proactively market to the employees of those companies
- Influence your payor mix proactively
- Publish articles
- Publish videos
- Hold work shops
- Embrace social media
- Be on the first page of Google
- Develop cash based services
- Proper utilization of staff and space
- Embrace technology
- Mentor a key staff member to be in a position to manage the practice in your absence
Who are Potential Buyers
There are over 40,000 physical therapy practices located in the United States. The vast majority of them are privately owned. The most likely buyers are large private companies, private equity (PE) companies and publicly traded companies, all of which are referred to as strategic buyers. There is also significant ownership by non-for-profit companies but those organizations unlike strategic buyers tend not to pay a premium price. Additionally, individuals who are looking to “buy a job” are typically not strong buyers because they tend not to pay a premium and usually do not have a ready source of funds requiring them to seek out bank financing.
The Selling Process
Selling any business is not a sprint but rather a marathon and can take from six to twelve months to find the right buyer. It is a complicated process that should not be taken on alone. As the owner your number one job during the selling process is to continue to run the business as you always have. A major pitfall of many owners who try to go it alone is that the selling process overwhelms them and as a result the business suffers and never sells.
Physical Therapy practice owners who want to recognize the best value and terms upon sale for their business would be best off by engaging a Mergers and Acquisition (M&A) advisor, preferrable one who has experience in the healthcare industry.
The advantages of an advisor are many. Using an advisor from the start actually allows you to select a buyer and the ability to explore options that you might not otherwise be familiar with. Additionally, if you are more than a year out from wanting to sell, working with an advisor early on can help you better understand what buyers are looking for and position your practice for top dollar.
Other benefits of using an advisor is that they can help you connect to an extensive network of buyers and they have the skill set to market your practice in a way that sets it apart from your competitors and use the market to your advantage. An advisor will know which groups are buying and what the current pulse of the market looks like. This means an advisor will be able to help you lay out the groundwork for an optimal deal structure based on current market conditions.
Most importantly an advisor does all of this CONFIDENTIALLY so your staff and referral sources are not aware.
Turning Point Advisors in uniquely qualified to lead the sale of your Physical Therapy practice with a team that includes a former healthcare executive who has experience working with healthcare companies. A team that combines both years of M&A experience with years of healthcare management experience lets any seller know they will be in the best hands throughout the process.
[1] EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization.
[2] Federal and state income taxes paid by a C-corporation are a legitimate add back. Personal income taxes paid by the owner, payroll taxes, property taxes and personal property taxes are not add backs.
