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Paul Martin

Good afternoon, and welcome to another episode of Paul Martin's Crucial Conversations today. We are really excited to have with us, Aaron Kraai now you say Aaron Kraai. Who was that? Especially those on the West Coast and maybe those on the East Coast?

I bet if you're in the Midwest, you know who Aaron Kraai is. But Aaron is the CEO of Doctors of Physical Therapy Doctors. A physical therapy has literally come out of nowhere and is growing rapidly. There are private equity backed company that's based out of Naperville, Illinois.

They have grown to 72 clinics, and those clinics are located primarily in the Midwest, Illinois, Michigan and Wisconsin. I heard as a doctor of physical therapy, and he received his degree from the Great University of Southern California. Now listen to this.

He also has degrees in biomedical science, molecular biology and cellular biology. And I'm not feeling all that smart here today with you. But hey, let me tell you, it is great to have us with you today.

Aaron Kraai

Thank you, Paul. Appreciate the opportunity and appreciate the great introduction. Thank you.

Paul Martin

Yeah, yeah. Thanks for coming on with us. And again, really excited to have you. So, Aaron, I know you're not a brand new acquirer. I mean, with 72 clinics, but you are one of the newer acquirers in the market.

And many of our clients, when we bring up newer acquirers, as you know, they ask a few questions. The first question is, is your strategy around for becoming a successful company in this industry? Is it different and unique from the strategies that are used by some of the larger legacy companies and what they're following?

Aaron Kraai

Yeah, I think it's a really great question. I think everyone understands what kind of the bigger companies have done over their time, so I'm going to focus on what we do. I think the biggest distinction is it's my baby.

I was the one who mortgaged my wife's wedding ring, my Toyota Camry and my grandfather signed the note 15 years ago. I was the one on Sundays going in and fixing a toilet. I still am sometimes, and I am still the majority owner of DPT.

So I think the biggest distinction is that it's my baby. And so it gives me a little bit different perspective on the emotional component of Partnering with a company. We tend to focus on mom and pop shops, mom and pop shops, meaning one clinic, five or six clinics again. I think that's a distinction. I think a lot of the bigger companies focus on kind of getting scale quicker, where ours is more focused on companies with great reputations and in a market that we feel that align with our values in regards to care, customer care, customer service, how patients should be treated and trying to put their reputation together with our systems to put an equation together of one plus one equals three.

So there's no secret Sauce Other than the fact that it's my baby. I hold the trust Of our Partners near and dear to my heart. I give them my word that I'll take care of their baby and and that's how we've been able to grow. It makes this a little bit different than kind of a roll up strategy that other bigger companies might do.

Paul Martin

Yeah, really interesting. And you know, we've worked with Aaron and his company and yeah, really do a great job with, as you said, that one to five clinics and the struggles and challenges that those business owners in those sized businesses tend to have.

You guys tend to come in and really fix them, fix those issues for them. And before I say the next question that we get asked, you know, a molecular biologist cleaning toilets? I mean.

Aaron Kraai

Hey, as our private practice owners know, you do what you need to do. Matter of fact I just sent an email last week this week with the reduction of staff because of COVID, that if one of our director of operations need a clinician, you know, I can still drop down and get in so you do what you need to do. And there's no ivory tower in this company. I can tell you that much.

Paul Martin

That's great. That's great. So what are the characteristics of a company out there that would thrive by joining your company? You know, you mentioned, you know, kind of the smaller single clinic or up to five or six clinic owner.

But what are there some of the characteristics of companies that you think would thrive at team?

Aaron Kraai

Yeah. Well, I think another important point is that we're not doing anything different than the mom and pop shops are all. We have a little bit of scale, which gives us traditionally a little bit better contracts. We can buy it at a better rate. Sometimes we have more systems. So when I say systems, we have a digital marketing team, we have a workshop team, we have a business development team that quite frankly, I couldn't afford when I had three or four or five clinics either.

So I want to make sure everyone understands we're not doing it. There's no secret sauce. We got a little bit of scale. And so our ideal, our ideal partner, has been traditionally clinicians on their sunset years that have, you know, 53, three to five years left, maybe one year that Mass Effect one in Wisconsin.

Right now, she's got six months, she's there and I'm out in six months, I said, OK, we'll make it happen. So ideally sunset your great market reputation, usually long standing reputation in the market with A support staff, a junior set of parties that are looking to grow because that is another component of our strategy is to take that reputation, throw some gas on it with our systems and then add one or two clinics around there to give those junior parties an opportunity to have their own clinic.

What that does is significantly reduce our risk on trying to build a reputation that market reputation is already set. We take the risk. I'm putting the new clinics down there and now we've got two or three clinics with that name on it.

And that reputation in the market, so ideally sunset years, someone that really wants to protect their baby and their legacy and their people because we do keep all of their people even in the billing department. And I want to ride off into the sunset with their head held high and kind of.

Paul Martin

Yes, and it's so interesting that you started by saying that this is your baby.

Right? And so you understand how other private practice business owners out there feel about their babies? Absolutely. And so you want to protect that for them. And yeah, we have found that to be just 100% accurate. You know, with some of the opportunities that we've worked with you on.

And yeah, absolutely do what you say, you're going to do for sure. Percent. So let's talk about some of the nuts and bolts of an acquisition process. Mm-Hmm. How do you see that the way in which you guys go about acquiring a company is different from the approach that some of the larger legacy companies and who would be best served by that approach? Yeah.

Aaron Kraai

Well, first and foremost, I do it. We don't have a merger and acquisition team. We don't have teams that come in and it's me. I sit down with the owner. No one to build trust. We built this company on trust to really understand what they want and more importantly, what they don't want.

Because whatever they don't want to do, we have a someone in the system that can help do it. I would also say that there is no game plan, meaning there is some bumpers, but every single deal we've done, almost 20 of them Now have been Individualized to that owner and to that situation. So there is not a game plan And We have to do it this way and we have to do it that way. And this is what we do and take it or leave it. We it's my baby again. And we do what's right for both of us because this is a long term relationship for us. This is not trying to flip a house, trying to roll it up and get rid of it. This is a long term investment. And for both of us. And it starts right away with trust. So I do it.

I'm trying to find a win win. We keep the brand for a fair amount of time. Again, no timeline on that. Some we've turned over and 18 months, some have taken three years. It really does not matter to us. It's not an ego thing. There is some benefit in having it under one brand eventually. But until those referral sources and that reputation in the local market start to identify it with that local brand, there is no reason to change that brand at all.

So again, I would say that we have kind of a broad range game plan, but every single deal has been 100% individualized to the person or the company.

Paul Martin

Yeah, that's really interesting because I would tell you that you brought up something that is also a question that many companies ask us about new acquirers and are they going to change our name? And your approach is really, really interesting in that. Again, it's not a light switch. And you know, it sounds to me like what you're saying is that in markets where it makes sense, because that's what I ask. When somebody asked me that question, I said, Well, if you could improve your performance by at some point changing your name, would you do it?

Aaron Kraai

Yeah, it's really important. Again, what we're actually buying is not the tables, the tables and the Swiss balls in the clinic have no value to us. You know, it's the people. It's the brand name that's been in that market for 20, 30, 40 years. That's really what we're buying. And so for us to come in there and think that we can do it better or our name is better. In areas that people have no clue who you hire just Doesn't make any sense to us. And also, it's really important that we show it as a partnership with the local brand for the referral sources for their former patients. And it's not a company coming in and ripping down the old logo and putting up their logo.

It's just not the approach we've taken. Not to say that the other one is right or wrong. It's just not our approach.

Paul Martin

Yeah, very interesting, very interesting. So what would some of the former owners out there who have joined the? What would they say and how would they observe what what your culture is all about? How do you think they would describe your culture?

Aaron Kraai

first and foremost, built on trust. I've built this company completely on trust and honesty and transparency. I think trust starts day one with us and we never waver on it. What that allows is that we will make a whole bunch of mistakes. The process has never been perfect, but if there's trust involved between myself and that owner and our company, but myself primarily and that owner will make it right when we do make a mistake, we'll fix it. Mistakes will be made. It will never. We've not done one that's been perfect. I promise you'll never be one that's perfect, but trust that there's no mal intention that there's that we're not trying to pull a quick one on you and that everything that Aaron said prior to the deal is now flipped. That does not happen. We will make mistakes. But the trust is there that will make it right and a simple text to me. And this isn't what you said or this isn't what we did, and it will get squared up.

And it has. And I think that's the number one thing. I also think that they're they're there. They also will say that we do have to have a little bit of structure, more structure than a mom and pop shop has because of just of our size. Again, having to Manage You know, almost 500 employees takes systems. And so I Think that there is a little bit of a learning curve on getting used to some of the systems. Again, it's not. It's not lines in the sand. It's not that at all. But these owners have done their own thing for 40 years, and we do take a lot of their things and make our company better.

But I think in the beginning, some of their it's a new learning curve for them and not a negative way, just as a new thing for them. I also think that they'll say that that deputy is made up of good people doing good things And Trying to do do the right thing at all times. We have to have a business. We have to produce profit. Doing it the right Way Is, I think, a thread that goes through our entire company.

Paul Martin

Do you think that they're kind of their view on what they had going into a partnership with you and for their people? Do you think that has changed in some way since they've joined your company? Whether it's positive or negative.

Aaron Kraai

Yeah, actually, I think that they're I think they're really happy because I said, Hey, guys, we're going to take your one clinic and we're going to make three of them in the next year, and we're going to give Joel and sue an opportunity. And then it happens. I think that they have the same reaction you're having right now, Paul, right? A big smile on their face like, holy cow. Now I've got three. Whatever their whatever their logo is, three logos in the same town or in that geographic town. And I think I think they're real proud. And, you know, they're the ones that made the junior parties have an opportunity with these two clinics. It's their it's they're the ones that decided to partner with us. We just did what we said we're going to do.

They're the ones that give the opportunity to these junior. So again, it just solidifies that culture that they have had and that the companies that they have that they made the right decision for their people as they ride off into the sunset whenever they want to it within six months. Some do it in seven years. Right now, we still have one that's still hanging around, which is great we love. I told her she is going to come and sit and drink coffee all day. I don't care as long as she's in the clinic. We want her around. So.

Paul Martin

That's great stuff. That's great stuff. Yeah, we have so many folks and they'll say, you know, I guess I want to be out in a year. Whatever it takes, I got to be out in a year. Yep. And what we've applied to them is that maybe in some companies it would work well to have you out in a year, but you may find that you start really enjoying having a partner and having someone to bounce things off of and having access to a CEO like yourself. And they like the idea that they don't have to do this alone anymore.

And next thing you know, they're two, three years into it. And yeah, we're still talking about, how's it going?

Aaron Kraai

Yeah, you know, one of the first questions I ask them is, what don't you want to do for the next couple of years until you retire? You say, Yeah, and I want to be out in three years, OK? What don't you want to do? Aaron, I don't ever want to see a payroll ever again. Perfect. We have that. I don't ever want to market ever again. I want to treat Monday, Wednesday, Friday, and I want to be off by 2:00 on Friday.

Great. We have the ability to do it. So it's a different question. Now, now what do you want to do it? What don't you want to do? And then we'll move around it. And again, every single one of our owners have had a different timeline. Every single one of them have chosen to do different things and we just build it around it. And I think that is an absolute luxury that we bring to the table That Might not be out there for other offerings.

Paul Martin

Yeah, yeah. You know, you talked very specifically about, you know, a little bit of a criteria that you guys look for and seek, which is, you know, one to five clinics or maybe more, but really specific on the type of owners, as well as the type of businesses that you're out there seeking.

How do you determine what geographies you will acquire and then grow in versus other geographies? How do you make that determination?

Aaron Kraai

Yeah. Well, we know our sandbox really well in the Midwest tier Have cut Our teeth with a lot of companies that you know about everyone knows about. And so we know our our sandbox really well being in this market for 15 years. So we have we want to stay in the Midwest, Minneapolis, down to Missouri, over to Ohio, up through Michigan, kind of in the Midwest area. Number one, it's I won't be able to provide the resources and support if you were in Washington state right now because we just we don't have a brand there, we don't have operations there. It would take a big lift For Us and I don't think that's fair to owners. If we're going to say we're going to do our side of things and then have to rebuild a new system. With that said, we do Have industrial Sites in 19 states across the US. And so we are looking to put acquisitions or new clinics around those, for example, Dallas, Texas. We've got four sites in that area. We could easily put an acquisition in there because we have operations, we have marketing, we have everything in the market there.

So what I would suggest is if anyone has questions to call you and Then You can connect them with me, depending on Geographics. But again, Midwest for outpatient clinics, we have some brick and industrial sites around the US that we are looking to acquire in very specific areas. So if they contact you, Paul, then I'm sure They'll get to one of Us Eventually.

Paul Martin

Absolutely, absolutely. And so crazy market out there right now. And you know, the market, just like I do, you're in it every single day and it's it's a it's an exciting market to be in right now. What advice would you have for business and business owners that are out there preparing for this market?

They want to do a deal transaction in partnership and they want to do that in 2022, maybe 2023. What do you think are some of the most important steps that they should take to prepare for this market?

Aaron Kraai

Yeah. first and foremost, get references. Get a reference list. Call those references. Ask them a ton of questions. I've never been on their side of the table, so I can't empathize with them. So I we give them full disclosure all of our entire roster. Our previous owners have been in that position so they can empathize with the emotions and the questions and we Have people that's been with us since 2016 that we acquired and we've got one that we acquired in May. So I think that there is a very, very important that you check a reference list and not just the reference list for partners that have come on in the last six months because it's a honeymoon.

I would check a year out and I would check three years out and five years out. I think the reference list is the most important thing that you could do. The numbers are the numbers and there's a range that the value of the clinics are in and and there might be some wiggle room one way or the other. But the reality is, is that once that deal is signed, you're in a new marriage for a for a duration of time. And I think the reference list is the most important thing that you can do. Getting ready for this to pick the right partner, the numbers will be the numbers.

I think the other important thing that we see with mom and pop shops and cash based businesses is that and owners like I do run personal expenses tax wise through their company and that for someone like myself, it's defining those pulling those out so that you can get an add back for it. But more importantly, so I can understand what the business looks like on a go forward. We're not trying. I'm not trying to jam anyone on manipulating an adjusted EBITA, but it is really important that we can really see what the business is on a go forward.

When you take out all of the personal stuff that you run from a tax strategy standpoint out of that business and your accountant will help you with that. I think that's a really important thing. And then lastly, check those references. I can't say enough if someone's hesitant to give you a reference list, that should be a huge red flag. We're on the other side of it. We want you to ask all the all the hard questions and and ask what happened when things went wrong because things go wrong.

It's not perfect. Ask what? How did people behave when things went sideways? Did they? Did they flip their colors or did they stay true and and get through it? I think the reference list will give you a ton of insight to the right partner.

Paul Martin

Yeah, and that's somewhat unique in this industry to have kind of that open access to all of your former owners, sellers, whatever we want to term them. But those who have joined your company. And I think that's unique and what you also talked about, we see that and I and I would ask if you see this as well, it's it's delays, you know, when there is a chunk of dollars and they're saying, Yeah, those are all just personal, OK, they're personal. But you know, what are they? How do you know it causes delays in the process?

Do you find that when companies hit these delays that other companies may get moved in front of them? And how do you guys handle delays like that, especially if they're, you know, not having any help?

Aaron Kraai

Well, I think it goes back to again perspective and Long Term vision versus short term You know. We're not trying to nickel and dime a deal over, you know, a car that's been used or something like that. So again, I think it's just our philosophy that we're investing for the future and we feel that if we do our job and you guys do your job and the owners do their job, that the company will be worth more and two to three years, we've proven that over and over again. So we're not going to worry a lot about that now. If it's it's obviously way out of line, there'll be a conversation. We haven't seen a lot of delays, primarily because of my relationship with the owners and I say, Hey, guys, the lawyers are going to get involved. There's going to be ten points that they're going to want to work through you and I can work through seven of them and say, Yes, no, yes, no. There's going to be three points that the lawyers are going to argue over It's it's lawyers doing what they're supposed to do. Protect you, protect me. At the end of the day, you and I are going have to trust each other that this one in 1,000,000th potential, that might happen. I will deal with personally, right, and so usually we don't see much of a delay in that side of things, but if there is any hiccup, it's usually in that last two weeks of legal and at some point I just say, call the owner and say, Hey, I'm good, you guys. Good luck trust that I'm going to do the right thing and it gets done.

Paul Martin

Yeah, that's a great approach. Great approach. Well, look, Erin, I really appreciate you coming on today. This has been refreshing, and I think Deepti has certainly now made a name for, you know, something that is your baby. You know, your baby is now a significant business in this industry.

And you know, as I said in the beginning, many of you may not know our cry, but you're going to get to know him. And you know, we've really enjoyed the opportunity to work with you on some transactions and we look forward to it in the future.

And I just want to really thank you for sharing today for our listeners.

Aaron Kraai

Yeah, thank you, Paul. I really appreciate the opportunity to talk to you and the audience. And like I said, if anyone has any questions, reach out to yourself and I'm open to talking to anyone about anything. So if there's any further questions, let me know.

Paul Martin

Absolutely will do. And for all of you out there, thank you so much for joining us today. A lot of great valuable information and really appreciate your participation and click below if you want to have a conversation with me. And as Aaron just said, if there's something specific around, we'll pass you right through to talk to Aaron without hesitation. So I look forward to seeing you all in the very near future. And as I said, if you want to talk.

Thank you.