10 Factors That Improve Your Sale Value (Multiple) With Eric Miller Of Econologics

If you’re looking to sell at any time, especially in the next two to five years, this episode is for you! There are things you can do to maximize your sale price, and in this episode, Eric Miller of Econologics shares with us 10 factors that make a significant impact. Each of these items doesn’t make a huge impact by themselves but combined, they create a well-run, cash-flowing clinic that is easy to maintain (if you want your own, personal ATM) or sell for maximum value.

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A long-time frequent flyer guest, Eric Miller, is joining us from Econologics . Eric, thanks for joining me.

I’m excited. This is a pretty cool topic we’re going to talk about, especially with all the craziness of consolidation and selling occurring in the physical therapy industry.

I was at a conference in Florida, and Eric was presenting on a number of factors to physical therapy owners in the group we were with. This slide came up. Immediately, while he was presenting, I was texting him like, “We need to do an episode about this.” It made it easy. The topic is relevant because even before that conference in Florida, I was at another conference. In my course field, the private practice section president for the APTA had a couple of guests talk about acquisitions, things that are happening nowadays, and what to consider when you’re selling. The market is still superhot for selling your PT practice. I don’t know if it’s the same in other industries. Is it the same in other industries?

It’s hotter. It’s any healthcare business where there are barriers to entry because you have to be licensed to do physical therapy, veterinary, optometry, or whatever it is. There’s a pretty good demand for it. There’s a demand for healthcare. That’s not going away with an aging population. These businesses do cashflow if they’re run correctly. There are profit margins there if they’re run correctly. They checkmark all the boxes that private equity groups would look for.

Thus, in a number of the deals that you’re seeing nowadays, the multiples are getting higher. That’s why I wanted to bring on Eric to explain more what multiple means, for those of you who don’t, and EBITDA. He’s going to share with us the ten things that can bring us a higher multiple if we’re looking to sell our practices. For those of you who are reading, number one, these are all good things to strive for, even if you’re not selling. If you are thinking about selling in the next few years, you need to put the pedal to the metal and be focused on these ten things. Wouldn’t you say that, Eric? Would you agree?

Yes. If you view your practice as an investment and just not a job, you want to be able to get value for it because you did put a lot of hard work and effort into it. It does have something of value, and you want to try to get the most value that you possibly can. There are factors that a buyer does look at that are more important than others and allow you to get a higher valuation for your business.

It is not about the valuation at a sale. A lot of these factors can improve simply your profits going forward. Even if you didn’t want to sell it, these are good metrics to have solidly in place.

They allow you to separate yourself from having to do all the work and enjoy more of the cashflow of the business by doing some of these things as well. Tie other people in that are leaders. Those are all things that you want to do anyway. They happen to be the right thing to do for valuation.

They make you the most profitable. If it’s the most profitable, it’s the most valuable when it comes to a sale. Let’s get started. Before we get into it, let’s describe those two things. Number one, we’re talking about the ten factors that bring the highest multiple when it comes to a sale. Number one, what is multiple? It’s a corollary. What is EBITDA?

The technical term for EBITDA is Earnings Before Interest Taxes, Depreciation, and Amortization. It’s a fancy way of saying what the earnings or the profits of a business are. That does determine how much confidence someone would have in buying a business. If you have low earnings, that means that there’s a lot of expense, which means that there are a lot of business problems going on. You don’t know where it is, but it is somewhat reflected in the fact that you have a very low profit.

If you view your practice as an investment and not just a job, you want to be able to get value for it because you put a lot of hard work and effort into it.
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When someone’s buying a business, if they see that they have a business that has low earnings, they have to go in and fix a lot of things. They’re not going to overpay for something like that. Whereas if you have a business that does have more earnings and more free cashflow, they have more confidence that this business is run correctly. They’re not going to go in and have to fix a lot of things. They can operate.

The reward you get for having a higher earning or profit margin business is that they will base your valuation on a multiple. Where they get that multiple is probably some algorithm that I have no idea how to factor. I know what, in general, I’m seeing now, as far as multiples are concerned. I’m sure there’s some scientific method behind it, but now they take your earnings and times it by a number like a 5 or 6 multiple.

If someone wanted to do it quick and dirty, get your net profit and multiply that by five.

If you have $300,000 of net profit and a five multiple, it would be pretty safe, 4 to 5. That would be a $1.5 million valuation for your business.

What I’ve seen with those multiples is a lot of them, like real estate, they’ll go off of comps of other sales. They’ll look at a number of clinics. Essentially, the thing that affects that multiple the most is the size of your net profit. If it’s a $100,000 net profit facility, the multiple will be lower. If it’s a $500,000 net profit, the multiple will be greater. If you’re talking $10 million net profit, the multiple starts to go like a hockey stick pattern.

I don’t know what the price to earnings would be like an Apple stock. It’s probably pretty high. Why? It’s because people have confidence in Apple that they’re going to continue to produce good products and turn over a profit. It is that expectation of earnings that you see reflected in what that multiple would be. To some degree, that’s what we’re talking about here. That would be reflective of what a multiple would be.

Let’s say Apple is trading for 30 times its earnings. That seems pretty high, doesn’t it? Apple is Apple. They put out good products. You can see how risky people do view a smaller business because your multiples aren’t near as high as that. The buyer isn’t as confident. Therefore, the multiple is not going to be as high.

We understand EBITDA, and the multiple applied to it. That’s going to determine the value of your company. The value, in other words, is the potential sales price. It’s a starting point when it comes to considering the value and what you might get from your company. These things that we’re going to talk about are what can we increase that multiple. Even if you were at $100,000 in net profit, it isn’t the same all the time.

As I go through this list, I want to make sure people are like, “I’m not even close to any of these numbers.” That doesn’t mean that your business doesn’t have any value. I’m talking about how you get into the physical therapy industry as of May of 2022 and what is generally going to bring the highest multiples for practices that are doing maybe under 2,000 patient visits a week, which is still a lot. What are those? We’ll bring up the first one. It would be practiced with at least $100,000 EBITDA. That’s a lot.

It’s a big mark, but does that mean you won’t get a good multiple if it’s less than that? No, it’s just going to start coming down a little bit. Let’s say you’re at $500,000. The highest one that I’ve seen is someone who got offered a ten multiple, but they were all over $800,000 in EBITDA to be able to get that much. If you’re at $500,000, which is still good, maybe you’re looking at a 6 to a 7, so it’s not like it’s going to go from a 10 down to a 2. It’s going to be a gradual decline as your EBITDA comes down. If you want to get the highest multiple, you have to have something over $800,000 to be able to qualify for something like that. That would be number one.

Number two, you have over four producing practitioners or associates. What does that mean? In the PT industry, it’s a little different because a physical therapist doesn’t produce as much as, say, a veterinarian does. You need to make sure that you have multiple practitioners in your practice. You can’t have a few. You have to have multiple practitioners in your business as you go. Having a lot of practitioners or service providers that are in your business is going to be important to get the highest multiple. They don’t want to see a concentration of production in any one person.

I know you’re producing this for multiple industries, not just PT. Maybe veterinarians in one site might be able to generate that EBITDA at $800,000. PTs, probably not, but based on my experience, I want to put them at two cents here. If anyone clinic that is under 3,000 square feet, they can get 4 to 5 highly productive PTs onboard. That’s a sweet spot in the PT industry. At that point, your production related to your fixed expenses is at a pretty good ratio. You’re getting some pretty good net profits. In order to get that $800,000 EBITDA, you probably have to have a few of those.

We’re one big clinic. The revenue number at a 20% profit margin would be pretty close to $4 million or $3.8 million, somewhere around there is what you would need to do in total revenue to be able to generate. It’s a lot, but it’s certainly not undoable. It’s something that someone can do. They’re not asking for the impossible. It’s not like you’re asking, “You need twenty clinics and thousands and thousands of patients.” With that $4 million or $3.5 million business, you can get a pretty good multiple for that. It’s an attractive asset to a buyer if you can do something like that.

Number three, demographically favorable or in a high traffic area. This speaks to the population. If you’re in a rural area, that’s probably going to be a ding against you in terms of multiples. They certainly want to make sure that you’re in an area where there are a lot of people, it’s growing, and all those things are in favor. It doesn’t mean you have to be in the city or an area that seems to be growing. There’s a lot of traffic going on.

It wouldn’t be hard to get a high multiple if you’re in Podunk, South Dakota. Apologies to all those living in South Dakota, but there are rural areas in South Dakota that might be hard to get a highly productive clinic. Maybe I’m wrong. Maybe there are some amazing South Dakota clinics.

You got to think about these bigger buyers. They also have locations and directors that have to manage all these practices. They probably like them close together in highly populated areas. It’s probably easier for them to manage and easy to travel to. You got to think about these things when you decide where you’re going to open shop. Nobody thinks about this. All you’re thinking about is, “I need to see a patient.”

I wanted close to home.

When you sit down, and before you start your practice, these are things that are important. Number four, it’s probably true for any business, but you certainly have to exhibit a good online presence and take it seriously. What does that mean? It’s your social media pages, Facebook pages, all those things. That’s how people are connecting nowadays.

You can’t ignore it. You can’t have a bad website. Where’s the first place you go to? The first place I go to when I get a PT that comes on is I go to their website. I want to check it out and see what it looks like. If they have a good online presence, that means something. Does that have a lot of importance on the multiple? Probably not a huge amount, but all these things together are going to generate the highest multiple.

Number five, practice is well known in the community. It’s probably more important than what people think. What is your PR in your community? How well known is your community? How well thought out is your practice? That is very important to buyers. They want to know that you have a great reputation, are respected in the community, and that you’re involved in the community.

To attract good people, you have to make sure that you're well known.
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How would they assess that? How would you prove that your practice is well known?

This is where you almost have a marketing or a page on your website dedicated to marketing your practice of what you do for the community, your volunteer work, your associates’ volunteer work, all those things. You celebrate that and make that known. It’s like, “We’re going to celebrate one of our associates who do such and such at a soup kitchen.”

Number one, you’re going to need to do that anyway if you want to attract good people. They want to know that you are part of a family and care about things other than the practice and making money. To attract good people, you have to make sure that you’re well known. We don’t do enough of this in our office. I’m starting to try to figure out how we do that and how we put a spotlight on the good works that we do in the community. It’s important for a buyer to be like, “This place is well thought of.” There’s some value there. I don’t know how much of the multiples are going to be part of that, but it doesn’t hurt.

From my experience, they asked for our marketing plan. The fact that we had one was helpful. It probably shows up in your Google reviews. You should have a Google review program that should be getting stars and has recent stars, not a one-time push to get 100 Google reviews years ago. This has to be ongoing, “I’m giving you five stars within the last week or month or something like that.”

It goes back to what your referral rate is from doctors or, even more so, your return patient rate that comes from doctors. They want to see that. They asked for those numbers like, “What percentage of your new patients are physician referrals? What percentage is coming for a second time, your return patient?” The connection to the multiple directly might not be obvious, but connections to local charities, if you focused on a charity over the past year or years, would be nice to highlight and post on your website, have drives, and things like that.

These factors from 2 until 10 overall contribute to having a higher EBITDA. If you’re doing all these things, it’s going to be hard not to have a business doing pretty well. As we go through these, it’s almost like a formula. How do I get to $800,000 EBITDA? Have multiple practitioners, be in a good growing area, have a good online presence, and be well-known. Number six, to the point on the employees, having a leadership team is super important. More importantly, it is having a tenured staff.

The organization is made up of people. They certainly don’t want to see where there’s a high turnover or a toxic environment. I had this happen with another client selling to a bigger group. It got around to the buyer that there was some friction between the two practitioners, and they killed the deal. That’s happened twice.

It was for a $6 million sale. The other one was for a $10 million sale. When that friction was known and became apparent to the buyers, they said, “No way, we’re done.”Your employee, how you treat your employees, the comradery of the group, and your tenure does matter. Having good tenured executives that people trust and look up to is important. That’s going to add value to the practice.

I don’t know if this is going to be addressed at another point here down the line, but is this also an example of an owner who has developed a leadership team so that the day-to-day responsibilities aren’t solely on him or her? Is that what you’re also trying to say?

For sure, you’ll have different kinds of owners. You have some owners that like to do more of the executive work. They’re the owner executive type. You have some that are good owners, but they want to be practitioners. They like doing that. They know, “I still need to have leadership people underneath me.” They’re more owner practitioner types. You can be either one. I’ve seen both works.

It sounds like it’s an example of you having a leadership team in place, and they are trained and capable of not only performing the day-to-day responsibilities to keep the clinic or clinics running at a high level. Even if you were to step away for a prolonged period, they could see things continue to grow and maybe even expand through hiring or even other locations without you being physically present. There’s a huge value add to that where a multiple will significantly increase in that scenario. At that point, they can buy the business you walked away from, and there’s no real reason for you to stick around for a prolonged period.

Having that, that’s what almost deters people from why I would even sell at that point in time because now I’ve created what I want. That’s probably the best time to sell. It would most likely generate the highest value because now it can run that way. I don’t know if it ever can fully run without that owner there because the owner there drives a vision, but it certainly has a lot of value.

Here’s a good one right here, no major legal or compliance issues. I’ve talked with some people that this may not necessarily bring the multiple down, but it delays the deal getting done until these things get fixed. If you’re looking to get a deal done quickly, when you have some compliance issues, there are risks there for the buyer.

Either there’s a lawsuit or a Medicare audit, or something that’s occurring. Those things are most likely to get settled before anybody’s going to give you a dollar for your business. This is an area that a lot of people, as they start expanding and growing, I don’t want to say ignore, but you have to put different systems in place. The damage can be a lot worse when you’re only seeing 50 patients a week than when you’re seeing 500 patients a week. Making sure you don’t have a lot of legal or compliance issues is important.

When you’re starting off, some of that stuff is relatively easy and gets bypassed. When we sold again, to reference my experiences, they wanted the certificate of good standing with the state. I’d never had the certificate of good standing on file. I had to go find it somewhere. It was in the Corporation Commission or something like that. There’s a literal certificate that the LLC was in good standing. I had to find that.

It’s something like that, like your LLC minutes. They wanted that certificate. I don’t even remember if they asked for the LLC minutes, but they should be there. These are legal that when you’re starting off on your own, you don’t pay much attention to. You don’t think anything of it. You create the LLC, get credentialed, and go, but they want all your contracts. They want your insurance contracts, vendor contracts, and agreements with every employee. You should have agreements with every employee that are written with signatures, certificate of good standing, all the LLC paperwork, your articles of organization, all that stuff. They want it all. If you can provide it quickly and easily, it makes the deal go faster.

They want to close as fast as they possibly can, but they will be going to do it right. Your operating agreements are updated. We’ve had partners, and the operating agreements were written that somebody could kill a deal because he had not had them updated, and that’s caused some problems as well. It’s good business to make sure that all your legal rudiments and basics are in place and that you keep them updated. Pay your registration fees. You get your minutes updated every single year. It’s not a huge cycle. Have a checklist once a year. These are some owner functions that I have to do. I got to check on these things. It’s like an owner checklist.

In the physical therapy space, specifically, your HIPAA compliance meetings, and your OSHA compliance meetings, those things, they want to see your policy and procedure manual for HIPAA and OSHA. They want to see that you’ve had regular meetings. They don’t want to be blindsided by any of that stuff.

No one doctor’s responsible for less than 25% of total production. This is very difficult in the physical therapy industry. A PT is generally going to produce $250,000 to $300,000 in production. You have some that are superstars. The more concentrated it is, the worse, because you don’t want to have too much production dependent on 1 or 2 people. What they want to see is that you have multiple people that are responsible for the production. This is probably more relevant for some of the other industries that I’m in. If 1 or 2 doctors are doing all of the production and one of them is the owner, that’s going to lower the multiple down or something like that.

You’re talking about the providers. Can you extrapolate that in terms of your referral sources? You don’t want to see any one doctor or group be the major referral source for that clinic. If that doctor all of a sudden went sideways or left, or the clinic shut down, your clinic automatically goes down another 25% as well. They probably don’t want to see things like that.

Nobody wants to buy something that's trending sideways.
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You’re spot on. Your referral sources are not so concentrated. I don’t even know what the numbers would be like. How would you look at that? Do you want no more than 20% of your patients coming from one referral source or 10%?

If it was 10% to 20%, you’re okay. Above 20%, maybe you’re not well-diversified in your referral sources. Things could be said with payer mixes as well. Inevitably, there are some places in the country where you’re going to have a high concentration of Medicare patients, like Florida, Arizona, that stuff, or Medicaid patients. That’s usually not a negative so much as you got to the previous step. You have to have your compliance stuff in order to have a high concentration of Medicare and Medicaid because that program is still going to be around for a long time.

It increases your risk of audits, and no one wants that. The business has a consistent growth rate. Nobody wants to buy something that’s trending sideways. You’re not going to get a higher multiple because of that. You have to constantly be in the growth mode of new patients and higher revenues. Try to have a growth rate of a 25% growth rate over a 3-year period. That represents that you’re marketing and trying to expand the practice.

Those are things that a buyer’s going to want to see to give you the highest multiple. They’re going to be exporting a lot more money, even what the practice is doing as far as the sale is concerned. They need to get that money back as quickly as they possibly can. They have to know that there is a certain growth rate that they’re going to need to see for them to trust to give that much money. You got to have to do a lot of patient visits.

That’s something that helped me a lot. I asked my CPA to put a budget for the next year into place and to automatically put a 10% growth rate over the course of the year on my top-line revenue and profit margin so that I could say, “I want to shoot for 10%.” What more can we do if it’s not there? If that’s not there, you’re going along and being reactive to the financials. Whereas if you have some of those goals set predetermined and a budget can help you in that regard. You’re like, “I need to do a little bit more. What if we do these things?” and trigger some different questions in your mind.

The last one is that there’s room for expansion. If you have a facility or the ability to expand in the area, create multiple clinics, or have one big facility, there’s still room for you to see what is your capacity and if there is room for growth in that area. That is going to be something they’re going to want to see and know that capability is there for more expansion.

I have some commercial property. I’m willing to pay the asking price or maybe a little bit more on a property if 75% to 80% of the units are sold, and the financials are still working out well. If I fill the other 20% to 25% of those units, I can get an even greater cash return. I’m interested in purchasing that property.

If all of these things are in place, you’re going to have a heck of a business, regardless if you want to sell it or not. This is almost like an owner’s checklist of things to work on to get the enterprise value of the business at its highest level. If you can do these things, generally speaking, you’re going to get a pretty good value for your business. Are you going to get a ten? I don’t know, but I take an 8.5. Why not?

The one-off singular clinics in the industry, and maybe you’ve seen this as well, and you have a smaller practice, 2 to 5 therapists on board. The multiple is probably closer to 4 or 5, 3 to 4, somewhere there.

I would say so. Maybe it depends on where you’re at. Who knows what’s going on with some of these groups? Maybe they’re looking to recapitalize, which means that they’re going to get bought out by somebody bigger, and they need practice. If you’re lucky enough to be in a good area, they’re like, “I want that one.” They may pay a little bit more for that. It all depends upon circumstance in that respect.

We’re talking so much about how to increase the value of your clinic. There’s so much more involved when it does come time to sell. There are multiple other discussions to have after that point as to what sale terms you want to put into place and what you’re looking for. We’ve had conversations about that in the past. You need to look back at previous episodes of the show. When do you know if it’s time to sell? Are you ready to sell? I refer people back to our previous episodes. I know we did one in particular about how you know when it’s time to sell or how to prepare yourself for sale.

These are all good questions to ask yourself.

If you’re in that range of 2 to 5 years, I’d recommend you look at some of these episodes and start talking to some people about how to help yourself out because doing it on your own is going to be tough.

Build a team of people that can help you with this because of the stress of going through a sale. I’ve never been through one, but I’ve seen a lot of clients go through them. It feels like I’ve been part of them because of that. It’s a lot of stress.

6 to 12 months would be the timeframe.

It could take that long, but some of these are getting pushed through in three months. It all depends on the buyer. For a more professional buyer, the time is going to be much more condensed because they know how to do it. They’ve done it a number of times. If you’re selling to a competitor or an associate or something like that, it does take a little bit longer. Nobody wants to make a mistake. Everybody’s going to have their legal team comb through every single period. It probably would take a little bit longer to do, but the corporate buyers got a tape pretty good. You need to make sure you have representation. They’re not in the business of screwing people over, but who wants to take the chance.

If people wanted to talk to you more about it or get in touch with you, how do they do it?

They can go to Econologics Financial Advisors’ website, EconologicsFinancialAdvisors.com. We have assessments and other tools that we’ll get you connected to the right people so that you can start on the path of not only getting your business in a condition where it could sell but getting your household in a financial condition so that you’re financially ready to sell.

Thanks again, as always, for joining me. I appreciate it.

It was always a pleasure.

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