**Transcript was automatically generated by artificial intelligence.**

 

Paul Martin

Good afternoon and welcome to another episode of Paul Martin's Crucial Conversations. Today, we have with us once again Larry Benz, the CEO of Confluent Health. Confluent Health has been extremely active. They currently have over 30 plus partnerships representing over 500 clinics nationwide, 90 education partners, and in addition, 1500 plus workplace injury prevention sites. Larry, you've been busy. Thank you for coming on. Welcome.

Larry Benz

Well, I appreciate it. Thank you very much for having me. Paul, just count me in among the legions of fans of Paul Martin and Associates. We’ve worked on and off with you for, I think almost 30 years if my numbers are close to being crossed. And so it's just a pleasure to be affiliated with you and in your ecosystem of physical therapy operations.

Paul Martin

So. Well, thank you. I appreciate that. I appreciate that. So, Larry, today I really want to dig in with you on some of the very unique differences from we can call them bigs, we can call them larger, but let's call them the marquee company acquisitions. You know, how do you approach an opportunity with a rehab business? And let's call these marquee, you know, ten plus clinics. They're unique, right?

Larry Benz

Well, they're definitely unique. You know, I think oftentimes they sort of fly beneath the radar a little bit. You know, some of these folks are very quiet and humble and they've grown in a very sort of measurable way, sometimes by accident event. I like the term marquee. I had quite heard that before in regards to particular. So I think that's an absolutely appropriate name for them.

You know, I think they're unique because they might be in a rural market, for example, they might be urban. And we kind of look and try to get an assessment or what are the dynamics that's going on in that market that's enabled them to get to that size in those marketplaces, to the physician on their own clinics? What are the health systems look like?

Are there corporate or private equity backed players that they compete with? You know, I've always believed that private practice, you know, they're motivated by success and they can compete and win against anybody. But ultimately, you got to look at their size, their cash flow, their margin and their total, their total even their total cash flow. Those are still the lever arms of any business, whether it's one location or 100.

And then in terms of the specifics of approaching them, to me, it's really a bilateral due diligence process. We have to get to know each other. How many folks hire their CFO or their marketing person based on one interview or resumé? Those are the most unreliable ways to do it, so you have to get to know each other even more in these unique, murky situations.

The relationship is the key. What is their roadmap? What's their vision? What are their growth plans? I think the biggest thing I kind of look at is what is the runway? You know, if there are ten locations or more, how much runway do they continue to have with or without a partner? What does their team look like from a management standpoint? Are they positioned for future success? And, you know, all those things go into any acquisition, but when you have one that is a partnership in which is the only model we follow and one that is of that size, you have to even be more thoughtful in your approach.

Paul Martin

And, you know, you can sense, you know, at a peace conference or I know when, you know, we've been in any of these large gatherings of business owners, you know, these business owners, they kind of carry themselves just a little different. And I'm sure that, you know, when they come to a partner like you, they're looking for something that's a little bit different based on that size and success. What do you think these partners are? You know, these these marquee company business owners are looking for may be different from some of the more locally focused type of companies.

Larry Benz

That's a great question, because when they've gotten to that size and scale, they've been around for a while and more importantly, knowing what they want. They also know what they don't want. In my experience, they want to continue to grow and they they want access to capital. They want scale, sophistication and systems to make them better, but they also want to be contributors. And that's really key because our partnership model really relies on the interplay or the dynamics between our partner and owners and each other. We have a process we call, you know, better partners, faster, faster, fast friends, better partners, because our partners need to get each other because they want to contribute to each other. They're all very smart, but they're also very concerned about the eroding margins.

Right now, inflation is a big concern. Staffing is a big concern. And if it's a practice that has started to see margin erosion because reimbursement is kind of stayed stable, but their costs have gone up, they want to look to see how you can make them more profitable on the expense side of things. They want to get rid of things like compliance.

h.R. Payroll, legal. You need help with recruitment. They need help with their i.t. infrastructure. Digital marketing director, consumer spend. Payor contracting is a big one. In fact, i see the ones with ten or above that being their main concern is how can you help me get better contracts? What you in what you do get. You know, it's it's it really is truthful.

The larger you get, you have a little, little leverage because you can bring cost savings to a payer. And that's the first thing a lot of a lot of these groups want to know is look at my contracts. How are you going to help me get them better? Because they spend so much time agonizing over poor reimbursement. We all do.

And that tends to come to the top of the list.

 

Paul Martin

Paul Yeah. You know, these owners have done something unique and different again from maybe owners of smaller, more locally focused companies. What do you think are some of the key ingredients or let's call it the secret sauce for owners who have grown their businesses to this kind of level?

 

Larry Benz

Well, the one thing you know for sure is they've overcome a lot of obstacles so they can manage and they can lead. They've created relationships. They've built solid clinical reputation. You can't get to ten clinics or more without having the basic fundamentals, the blocking and tackling correct. They've established relationships. They've done a good clinical outcome and they've been attractive to therapists and kind of an entrepreneurial spirit or in a passion. All these things are not easy to do, and at the same time they have incredible resiliency, grit, stick to itiveness. They have an incredible commitment to the profession in the business, and there they are to us. What makes this a wonderful profession and what makes it attractive to have these kind of partnerships? Because what you want to do is really continue to harvest and facilitate all of those things that have made them great and take away the things that they no longer want to do. And so it's a wonderful thing, really. And these are the types of partnerships and types of practices that we absolutely love.

Paul Martin

Yeah, it seems like, you know, as you described before, it's we want to get to here and we're here right now. You know, do you have some of those ingredients that can help us, you know, get get to here? We've also noticed just a very high level of curiosity from these business owners that want to just continue to grow and build and develop. And I think it's also within that curiosity that they've become so rehab business. Mark.

Larry Benz

You know, I agree. Completely agree.

Paul Martin

Yeah. I don't think they're any smarter than anybody else in the you know, I just think that they have, you know, had that curiosity. So these, you know, marquee deals for you guys are not always easy, no deals easy. But what are some of the biggest challenges specific to these, you know, kind of marquee deals.

Larry Benz

But it's it's it's interesting because oftentimes we are all so close to our business. We developed, you know, familiarity, bias around it. But what I find right now is because there's been so many sort of transactions or M&A in the space over the last couple, three years that they oftentimes come in hearing of rumors about multiples or about add backs or takeaways without really examining what that means in their own business.

As you well know, you know, a ten x multiple on one item is not as good as a5x multiple on other items, depending on how they're pro forma, depending on what credits they're giving and everything else. So part of that part of the biggest challenge of these things is really eradicating, you know, the bias, the rumors, the beliefs, the perspectives that they may have.

So you really have to sort of level set, you know, terms. What is valuation based on? Well, it's based on cash flow margin and growth. How best positioned are you? How much have you proven out a growth story or a margin story or a total cash story? What are your abilities for same store growth sales? What are your what are your abilities for opening up startups or your abilities for sort of tuck in acquisitions?

And then you get down to the other things. Do they have a legal counsel or a banker, a representative like yourself that is experienced in these transactions because it makes communication in the process so much easier and so much, you know, facilitate so much smoother, you know, sort of conciliatory response. You know, our transactions are bilateral processes because they're all partnerships.

These are not one off transactions that go away. And, you know, understanding that this is a service business and that part of the asset being purchased is them. This is a human capital business. Our our partners go home at night. They wear shoes. They they take them off, they go to sleep. Right. So they are the assets that you're purchasing.

And oftentimes they view their business and themselves separately. But in a service business, you really are one in the same. That's both to our credit and to our demise. So if somebody is thinking they're going to sell a business and walk away, that's fine. They just need to understand they're going to be the limited number of buyers and that their valuation isn't nearly going to be as good.

So those are those are the challenges and the sort of the sticky, sticky conversations that you have.

Paul Martin

Yeah. And it sounds like kind of education on a different side of the business than they already have run their business. But now going into a process, understanding how these businesses are valued, all those particulars about a deal, look, you are you are routinely the smartest guy in the room and, you know, one of the smartest guys I know.

Paul Martin

And but, you know, these these marquee business owners, they think they got, you know, something going on, too. Have you ever felt challenged at all by these types of business owners?

Larry Benz

Oh, all the time. All the time. The process, you know, is really grueling. You know, as I like to say, you got to challenge assumptions, especially your own. And in our our approach to these things is a true partnership and not a takeover. And we won't ever over centralize. And we want change agents. We want to find out what folks are good at and really, you know, continue to facilitate what they're good at and take away things that they're not.

I think the some of the bigger challenges in these types of transactions is the, you know, sort of the industry standard in any kind of M&A world is you put this tension around multiple bidders in kind of an auction process or a bake off. And one of the things we have to overcome is that our relationship with our partners is built on a consolidation strategy and a rollup strategy that allows them enables them to have much better transaction in terms of valuations going forward than their initial ones.

And that is a very difficult thing to overcome when the only thing they're thinking of is, well, what is my you know what is my multiple and what is my current valuation? But you also have to look at is what is your valuation going to be in two years, three years, five years? What are opportunities? Can you create for young partners that are going to really be the succession plan of your practice? Because most folks think that their succession plan is to sell to a buyer when really your succession plan is the legacy that you maintain going forward. And how can you best facilitate that with younger partners who you also want to become owners? And so when you get to all these issues of succession planning around ownership and being really true to your profession and understanding that your valuation today is one thing, but how does that look like going forward in a consolidation strategy?

Those are the biggest challenges that we have in large, larger plays deals. And we've seen so many of them come back to us years later and say, you know, I didn't realize that, you know, when I negotiated this put option in here for me, I didn't realize that if I would have been with a company whose valuation at an enterprise level was getting bigger and bigger and bigger, that I was really contributing to that but wasn't getting that that I would have been better off.

So, you know, it's really an education process. And so my encouragement in those situations is, again, get with a sophisticated representative because they will help you process, you know, on a pro forma basis what your current valuation is, the difference in what people are offering you, but then more importantly, what optionality do you have going forward to really magnify that valuation?

Paul Martin

You know, you hear the you know, the nightclub talk or, you know, the bar talk at TPS. And, you know, you still have folks that have this understanding of it. So all you can count on is what you get at closing assets before you get to close. And in many industries many years ago, that was very true. You know, you heard that from a lot of very well-respected business people that we when you look at the history now, if we just go back ten years of marquee companies that have come in to a company like yours and your specifically for sure and looked at what they have created for a wealth opportunity.

But what they got to closing away now you got another another wealth opportunity and it's very clear and the path is very clear. So yeah, I, I think that's a hard thing for many business owners, both small, medium and these marquee deals to understand and for these marquee companies how it is so important, so importance.

Larry Benz

Right?

Paul Martin

So what are your expectations for companies? The Marquee companies, once they've partnered with Confluent?

Larry Benz

Yeah, that's a great question because we get asked, you know, by by these types of prospective partners, you know, what is it? What is our expectation for growth there? What is your expectation? I've talked to this one company and they expect this to grow 30% a year. And quite honestly, we just take all of that off the table and we say, here's here's the reality.

There's no gotcha moments in a partnership. You know, whatever you represented yourself at pre partnership is likely the behavior you're going to be post partnership. And so we expect them to perform according to the plan that they've outlined to us, not that we've outlined to them. Right. You know, their plan in many ways is their valuation. Do they have, you know, is there a growth multiple based, you know, based on that valuation?

If so, we should expect them to grow. We've actually found it a lot easier to lower our expectations on growth rather than go into a relationship with this pressure that you've got to grow at ten or 20 or 30%. What are you telling us? What's your historical growth pattern? We can help you grow faster if you want. What are our opportunities?

And what we really try to do, Paul, is, I think, the most important thing is together. You have to create your own value creation plan around your partnership and how your bigger company in our case can flow, can contribute to that partnership. And so we expect them to be good partners. We expect them to continue to make an impact with patience.

We expect them to stay with sort of the secret sauce of clinical excellence, customer service, success, compassion and kindness, all those kinds of things and outcomes with their patients and and really having a talent management model around them. You know, we expect if their therapists or 5% of them are board certified, we want two or three or four years.

That's a double and triple. We want them have a lot of fun in the process. We want them to look at this as a you know, is something long term. You know, you mentioned what they you know, they oftentimes don't see their valuation say, okay, I'm selling 60, 70, 80% of my practice, but they don't realize it. And a really good model is that they're 20, 30, 40% can actually be worth a lot more than their 60, 70, 80% that they sold.

And what we've been able to demonstrate to many of our partners and there's there's something just wonderful about history and data and evidence, and that is that you've proven a methodology that that says you're 30%. If you do it right, we'll end up being way more work than your 70% that you sold. And so, you know, lots of practices look at their for one K every month but they don't look at the valuation of their practice.

And we encourage them. We force them once we become partners to really evaluate that on at least an annual basis, if not, if not more. And then what we do is give opportunities about every year and a half for them to take additional chips off the table should they want to do that, because you don't want them sitting around saying, Oh, when is Larry going to sell or when is this person going to sell?

It doesn't work that way, and it's really about what's best for the business. And in a good business, people always want to want to acquire cash. So we just expect them at the end of the day to be good partners, to be collaborative partners and know that there'll be challenges. But in other day there's no gotcha moments. We're all going to be good partners.

We're going to work through all these things together.

Paul Martin

You know, it's it's amazing the way in which this industry has grown. And it's almost like there's now almost this hybrid of private equity. So many companies get to this size and somebody tells them, again at a cocktail party, you know, you should go for private equity. I've had two clinic companies call me and say, I'm talking to private equity.

And I think what you just described and I think some of the other strategic companies have this same, you know, model. But, you know, you go to private equity, boy, they're going to have growth expectations. And other than money, what are they going to really have to offer to help guide and direct that growth? So you better be really well-established if you want to go that route of private equity and you better be ready to have Sunday night calls.

You know, Tom gives these folks, you know, sometimes a little understanding of what private equity is going to be all about. So, Larry, with so many partners, you have to have a story or two about companies, the marquee companies and, you know, kind of their evolution with flow. It.

Larry Benz

Yeah, I'm happy to. I mean I think there's a variety of, you know, sort of benchmarks or metrics you can use. I think, you know, one of them is the creation of value. The other is the number of clinics and number of therapists that they have without giving some specific geographical, you know, sense to it. You know, we've had companies that have had three or four locations go from, you know, eight or $900,000 and even up to 3 million.

We've got one company that that we partnered with in 2016 and that was about 1.7 million multi-site great operator there now over 11 million and even so think of their partnerships and what value you know they they've you know caught lightning in a jar now four or five times. Right. And so so there's lots and lots of those those to go through.

You know, the beauty of a really good partnership model is that you add value to each other in multiple ways, both on the revenue side and on the expense side, you know. And at the end of the day, you know, if your goal is growth, you want to get with a partner that can help facilitate the best growth for you in your market.

Every market is so different and in some cases it's going to be through. You know, we've got, you know, one company in the South west that is the same number of locations that they had when we partnered with them and I think 2018. And that doesn't sound like much of a growth story, but then you see that their same store sales have averaged about 9% a year and their evite has gone from about, you know, call it 900,000 to about two and a half million.

Well, you know, I'll take that over having more pins, you know, more pins in the mass or what's in the map. And so it's really a function of having a plan around each specific market, all health care is local. And so we have 30 some strategic plans in our company a year because we have 30 some partnerships and you have to approach it that way and we look at every partner.

So it's our only one. You know, we don't try to do a heavy handed or centralization over decentralization. It only makes sense to centralize certain things to help you maximize your opportunity cost in the business so you could spend the most time of what you do great at. And so, yeah, we have a ton of great stories around them and they've had tremendous amount of success at it.

I mean, from the time that we started and just formed Ted Fluent in October of 2014 to where we are at now, we have we have grown over 23 X in terms of size of our cash flow.

 

Paul Martin

Well, yeah, you know, and again, it's so remarkable how you because I've heard a lot of these stories and how these folks, you know, they just like you said, they kind of catch that lightning in a bottle and you have guided them. You know, it's almost a hybrid between. I always get nervous when an acquirer will say, we're going to let you alone.

We're going to acquire that company you guys are working with and we're going to let them alone. We're just going to let them be. I don't know. That's a really good approach. Or the day this deal closes, new signs are going up. That makes you nervous, too. So again, I think been fluid and some and other companies in the market have kind of taken that hybrid approach of the support they need to gain and accelerate the growth, especially for these marquee companies.

Larry Benz

Yeah, let me let me react to that for a minute, cause that's a really good point. So the spectrum is this I'm going to leave you, leave you alone and show up at a board meeting a couple of times a year or I'm going to come in and put my operators in your company. Yeah, those are the extremes.

Yeah. What you want if you're a marquee company is you want that spectrum actually going to about half to more that you don't want them in your company operating it, but you better want a level of intrusiveness because is going to make you better. You know, if you're if you if you were left to stay the same, you shouldn't sell.

You shouldn't become a partner with somebody.

Paul Martin

Exactly. Yeah. Now, great. Great point. Great point. So it sound like you're giving advice there, but what advice, kind of general advice would you have for marquee companies that right now they're thinking, you know what, 2022, it may be the year. How do they prepare? You know, maybe uniquely and differently from some of the more locally focused companies?

Larry Benz

Well, you know, there's this whole idea that they test the market. And I always get a little nervous when I hear that as there's nothing worse as you can attest to Paul, than just that a busted process. So there's just simply too much energy and distraction and money to to test it. But I'll think there's three or four sort of pieces of advice for, you know, let's call these marquee small business owners.

And quite honestly, it's not even a specific advice to the physical therapy. Small business owner. You can you can extrapolate this to any small business. The first one is about is really being very careful to be overly invested in your own business. You should always consider diversifying your own personal portfolio by taking some chips off the table and use them for other personal financial assets while allowing what you roll over, continue to own to magnify through the combined efforts of yourself and a partner.

We're blessed that we're in an industry where you have options to sell. I don't many in the medical profession. I mean, look at primary care docs, to say the least, that just don't have the opportunities that private practice do. That's that's sort of the first thing. The second thing I sort of alluded to and that is that, you know, I know plenty of owners that check their 401k monthly, but they never really check their own opportunities in their own equity, in their own practice.

They don't think of it as a dollar sign. And you have to look at, you know, your practice is a growing in value is a declining in value, and valuations do change. They change in terms of what the market will bear. And they turn and they change in terms of what your company is producing cash flow wise. So you have to look at your practice as an equity because it is if you don't look at it that way and just ignore it, you're literally throwing money away, in my opinion.

Yeah. The third thing is there is no best time to sell. And Paul, I know you get into these conversations all the time. You know, there's never going to be a best time to sell if you have runway for your business and you could do it all on your own, go for it. If that runway or opportunity could best be catalyzed or facilitated by a partner, you should consider it.

I will tell you, in my entire career of doing transactions over 30 years, I can only think of maybe one practice that that after, you know this is a typical thing they'll say they'll say, well, I think I'm going to wait another year because I think I can increase it on my own and my valuation will be better.

I only know one practice in 30 years. It was able to successfully do that. Most don't because you get caught up in the day, in the moment and you're so busy, you don't you're spent you spending so much time in the business. You're not working on the business. A good partner will help you work on the business. A really good partner will.

They really will. And be mindful of that opportunity. Cost your churn of what you're focusing on now is so much better. Taking those stuff that you have to do that is not integral to the value creating process. So that allows you to become part of the value creating process of your business. That's really the best time to sell is when that opportunity cost is too high because you're spending too much time in the business and not growing the business.

And I'd say lastly, and you'll get a kick out of this, as I was thinking about, is don't overly don't be overly concerned with what your college thing colleagues think. You know, it don't worry about their thoughts about you selling or partnering or doing what is in your best interest. With too many stories about colleagues who were reticent because they were so concerned about the overly romantic views of some of their business, it's your business and it's your professional asset.

But you know what? It's not your kid or your spouse. I know it's like your kid or your spouse, but it really is it okay? And and sometimes partnering will allow you to be a better kid or a spouse or a parent. Right. Mostly most of the folks in the profession that you have this belief that they're going to think less of you for partnering or selling.

You're simply jealous. Trust me, your real friends are rooting for you and they'll be happy for you. Don't let anybody lead you astray. Private investment in private equity, if you will, is the best thing that's ever happened to the business of physical therapy. By a long shot, not even close, and it's given more opportunities for teens with more options than they've ever had in their entire career or they ever dreamed when they went into physical therapy.

 

And that's a good thing.

Paul Martin

Yeah, absolutely. We've got great points. And yeah, we are all so blessed right now to be in this industry. We have had a long run and we continue to see companies like yours, Larry, bring folks and have stories of success, stories of success where there's clinical success. And there's also, as you said, valuation and wealth success. Larry, I appreciate it.

This has been, you know, just an invigorating conversation. I love talking about these marquee companies and how you guys have seen these companies in the past. For any of you out there that have any questions on the conversation that I had with Larry Benz today, click below. Give me a call. Larry, thank you. I really appreciate your time.

Larry Benz

You're welcome. Always enjoy it.

Paul Martin

Take care.