Using Data to Drive Successful Pre-Acquisition Diligence and Post-Acquisition Integration

Dan Shockley

CFO at Alliance Physical Therapy Partners

Learning Objectives

Please join the CFO from Alliance Physical Therapy Partners, Dan Shockley in this Executive Interview where he will discuss the benefit and the role of data when working with identifying acquisition targets and acquisition integrations.

  • Why should anyone be cautious of data received during diligence?

  • How can data be used to validate the information provided by the seller's management during the diligence process?

  • What pitfalls occur when too much reliance is put on data received pre-acquisition to post-acquisition integration?

"You have to make sure that you have a good understanding of your historical data, but also know that you have to be pretty pliable with what happens in the future."

Dan Shockley

CFO at Alliance Physical Therapy Partners


Hello, everyone, and welcome to the Connect virtual CFO Leadership Summit hosted on quartz network. My name is Britt Erler QN executive correspondent, please join me in welcoming our guest speaker here with us today. Dan Shockley, Chief Financial Officer of Alliance Physical Therapy Partners. Welcome, Dan, thank you so much for being here. Of course, thanks for having me, of course. And we have a fantastic conversation lined up today to discuss how to utilize data to drive successful pre acquisition, diligence, and post acquisition integration. But before we dive into that topic, I would love if you could give the audience just a quick introduction about yourself and your current role.

Sure. I am Midwestern, born and bred. I spent my first few years of my career at a large public accounting firm. In their audit practice, I decided that public accounting wasn’t for me. So I left and through various circumstances actually wanted backup at that same public accounting firm in a different role, though, in in transaction services, really focusing on mergers and acquisitions, really middle market service companies. And that’s where I’ve been ever since middle market private equity, mostly focused on health care. And so that’s how I’ve found myself here at Alliance. Alliance physical therapy is the seventh largest outpatient physical therapy network in the country. Yeah, we’ve got about 130 locations in 24 states. And we recently rolled out a virtual care platform, which is allows us to be the first physical therapy company that can actually treat patients both online and in person. So we’re very excited about that. And I’m excited to be here.

Absolutely. And quick question based on that new platform. Was that something you guys had in the works? Or something that you kind of pivoted due to everything going on in 2020?

That’s a great question. And it’s, it’s, it was definitely in the works. Our CEO is a former therapist himself, for about 30 years. And he has talked about virtual care for a long time. The issues were always about reimbursements from Medicare and insurance payers. And COVID actually helps speed that up. So we certainly wouldn’t be as far along without COVID. But it’s certainly something we’ve been focused on. So if we can find one silver lining out of out of COVID, that that would be one of them.

Absolutely, congratulations. And we’ve done this the same obviously having to pivot or in person summits and make them virtual. But I think, as you mentioned, the one silver lining is that we’ll probably keep a virtual aspect to our shows moving forward, because people have just found it so much easier, more convenient, it’s more efficient, so glad that you guys are able to do the same. And to dive right in here to the very first question, how does a company use data to identify acquisition targets?

Yeah, that’s a great question. And there’s really a lot of different ways that a company can use data. I think it depends on in for my frame of reference, because it is more private markets. In middle market, we tend to speak about smaller companies. So one of the best ways to use data is there are just numerous sources out there that have all kinds of private company information as far as profitability, fund route fundraising rounds, and just who their previous sponsors were. So you can, you can kind of look and see if if a company is growing and thriving, they’re likely going to be looking for an investor every 12 to 24 months. So if there’s a company that you’re interested in, maybe you did business with them, and thought that they might be a nice addition to that portfolio, you can do research that way and see if it looks like they’re, they’re ready for another round of investments. for public companies, I think it’s a little bit there’s obviously a lot more data available. And the interesting thing is that you know, the same dozen public companies get 90% of the of the attention when it comes to CNBC or The Wall Street Journal. But if you can dig in a little deeper, especially in an area where you you’re interested in, I think you can really find some interesting companies that that have a lot of potential. And one of the companies that falls into that category for me personally is teladoc, which is a virtual care medical website, so are virtual care platform. So they do a lot of either primary care, or just other kind of general maintenance, physical medical work. And, you know, five years ago, they were trading at $12. And now they’re up over 400. So that was one that I wish I would have invested in a long time ago. But it’s it’s kind of cool to see it, see it take off. So that’s, that’s kind of the way that I look at it. I think, you know, the number one thing is just be curious. You know, you’ll hear the phrase, don’t, don’t try to be a jack of all trades. But at the same time, I don’t think you need to stay in your lane, either. Certainly, ask a lot of questions, get to know the industry. But don’t be afraid to stay away from healthcare because you don’t know it or stay away from manufacturing, because you don’t know it. There’s never been a better time to learn about some of these entry industries, given all the technology out there. So that’s kind of that’s, that’s my thoughts.

Absolutely. And and what are some of the main data points that you are looking at when reviewing all of these companies? Obviously, if you’re viewing all different types of industries, as you mentioned, manufacturing, health care, are there some main data points across the board that you really focus on?

Yeah, that that’s a great question. And like you said, there are, there are many different industries and every industry is different. You know, the first one that I think most people would go to would be profit margin. So how much how much money is this company making? I think there’s ones though that are a little bit underrated, especially as it relates to growth rates and return on invested capital. And, and certainly, the cost of entering a new market, you know, for instance, in physical therapy, it’s not that capital intensive to open a new clinic in a new part of the country. However, if we’re a large manufacturing firm, then it obviously is going to be much more cumbersome to go in and get the the equipment and all the the the permits, and all that sort of thing. So I think people can kind of look at profit margin and say, This isn’t for me. But when you look at the broader picture, what is the competitive landscape look like? What does the industry forecast look like? You can get over some of those hurdles pretty quickly.

Of course, and in terms of the data that you’re collecting and receiving during diligence, are there any reasons to be cautious about some of it? Or is it usually pretty accurate and reliable?

Yeah, it’s a great question. And I would like to say it’s typically accurate and reliable. But you know, the fact of the matter is, these are individuals that are trying to sell the company and a lot of cases. So I say you wouldn’t, you wouldn’t buy a used car without taking it to a mechanic to check it out. So I want to buy a company without having accountants and attorneys kind of at least kick the tires. And to be honest with you, you can usually tell kind of the the quality of the data during diligence, just based on what is the sellers motive. If they’re simply maybe a founder that needs additional capital to grow the company, then you probably can put a lot more faith in their numbers, and if it’s just an older couple that wants to sell and go, you know, retire to the Bahamas. So you certainly have to be cognizant. But I also think that for the most part people are, are well intentioned, but there are always those those bad apples,

of course, with with every company, right, and especially when they are trying to sell something, how do you check that? Do you have a way of confirming those data points or Okay,

absolutely. So, you know, one of the main things and this is how I actually got an m&a is financial diligence. So what will happen is, especially for smaller private companies that don’t have the SEC filings, what will happen is, let’s say a private equity firm wants to invest in, you know, Brits manufacturing, what what that private equity fund will do is they would hire someone like me and my team to go in and really kick the tires and not necessarily perform a full blown audit. But basically just make sure that every the data that we’re getting out is it matches up well. There’s also just the whole kind of common sense aspect of it where, you know, if, if, if if Britt’s manufacturing is projecting a 20% year over year increase in the rest of the industries, you know, 5%, then you kind of have to, you know, use your use your intuition a little bit. Right, right. So, but there is a lot of things, you know, sometimes there are times where found founders may not take a salary to try to bump up the earnings. So, there are definitely some some things that sellers can do. So it’s always wise to get that second opinion, if you.

Absolutely. And how does data play a role in acquisition integration?

Yeah, I think I think that’s one area where we’re really just kind of the tip of the iceberg. As far as what we can do with with all the different data we have, especially if it’s a strategic acquisition, which would be when, for instance, Alliance, we just, we just bought a trial clinic group out of out of the Midwest. And so we’re able to take all of their data, look at look at what are their How are their outcomes progressing? What are they doing differently? Are they are they treating their patients better or worse? From from a financial standpoint, we can actually look at their payers and see what are they getting reimbursed by different insurance companies. And if it turns out that it’s smaller, maybe then then what we’re getting reimbursed. And we can go to that payer and say, you know, we we should be receiving that higher amount. But I think I think that’s a smaller piece of it, the larger piece is more just about increasing innovation, and synergies. And really having all that extra data can make a company a lot smarter. And as far as the strategic initiatives that they want to undertake.

Of course, and you mentioned innovation, have you guys had to make a lot of changes, in your process, innovating wise, especially right now during 2020, with pretty much everything going virtual?

Yeah. You know, healthcare is a really a part of the reason that I enjoyed so much is it actually is a fairly innovative sector, a lot of people don’t think of it that way. But just from a standpoint of medical records, you know, five to seven years ago, all the records were in in paper, and now we’re in this electronic medical records stage. So that was the first kind of wave of massive pivot towards more technology. And now we’re certainly seeing it with with telehealth and virtual care and in COVID has definitely sped that up. But I also think it’s been something where people have they, they’ve actually appreciated it, you know, I hear I hear a lot of people say, I can’t wait till things are back to normal. And I’m, I can do what I used to do. But I also, you know, personally, I look at it as there’s some things that have it not even work related. But some things I do that I hope doesn’t change, you know, I’ve learned that I can, you know, stay at home on a Sunday and not need, you know, all that interaction and can just hang out with the kids. So, it’s really, it’s an interesting time, but we’ll always be innovating, I think, especially with so much investment pouring into the healthcare space. And it’s, and it’s coming in from a technology perspective, that there’s going to continue to be innovation.

Of course, and I think a lot of companies, a lot of departments are in the same boat, you know, they’ve innovated, they’ve created these new strategies, these new platforms to work through. But most people I’ve talked to, they’re gonna keep that strategy in place. It’s not something they’re hoping goes back to normal. You want it to become kind of the new normal, the new the new future of the organization. So congratulations to you guys for making that work. And you did touch on this a little bit already, but I would love to do really do a deep dive into it. This data that you’re collecting, how does this help validate the information that the sellers management team is providing you during the acquisition process?

Yeah, so Again, it’s it’s really whenever there’s an acquisition, everything really starts around the profit and loss statement. And from there there are, depending on the company, usually four or five, really key drivers that will drive the business. So in physical therapy, for instance, it could be visits per day, right? So if there’s something like, if I look at a, at an income statement, and I see that revenue is increasing, but my visits per day is staying the same or potentially decreasing, that’s going to that’s going to set off an alarm for me that says, Okay, why explain this variance here? You know, it’s it, it’s really just kind of back to, to what I mentioned earlier that every industry is different. But at the end of the day, everything is kind of the same, you know, where if you can understand the four or five kind of key indicators, and get a historical kind of feel for what the data is telling you, then you should be able to, with a certain level of confidence project, what’s going to happen in the future. I do think there is a lot of when people look at projections, they always are thinking best case scenario, I’ve read that only about 10% of deals actually are succeed, as far as meet the investment thesis that was spelled out at the time of the deal, and only about 30% actually make money. So you know, it’s crazy in this time of all this extra, all this additional data, all these new technologies, but those numbers are staying pretty stagnant. So I think it’s a it’s a time where then the investor can really get smarter. And I think it also means that we really have to change kind of the deal dynamics. And I was gonna ask you that, you know, why is that percentage so low? Yeah, I think it’s because, you know, that, and again, I can only speak to, to what I’ve seen, but in in smaller private equity firms, you’ll usually have a deal sponsor, or ideal champion, that he or she may just fall in love with a company in their almost, you know, their their, like, stats be damned, if you will, they’re just gonna want to get that deal done. And I think as kind of technology becomes more a constant and every day, on a day to day basis, and maybe some of the individuals that are now getting into those more senior roles. That will change a little bit. But I mean, I’ve, I’ve seen it, I’ve been it’s, I mean, I’ve been guilty of it, where, where there’s a company that you really love, and you think we’re gonna, we’re gonna be able to make this happen, we’re going to be able to find all these synergies, and then the deal closes, and you realize that, you know, you didn’t buy what you thought you had. So that’s, that’s really what I think is that is the driver there is we have the technology, but we haven’t necessarily tapped into it.

Right. And that leads perfectly into my next question, you know, there’s always issues with technology, it’s never a perfect science. And relying too heavily on data can sometimes put you in not so great if a position, especially during the integration process. So what are some of the pitfalls of that?

Yeah, I think, um, it’s, it’s almost like, I joke that the forecast is always going to be wrong. It’s, I’m an I’m an accountant. So my job is very exciting. But you know, whenever you get a forecast you you’ve got to understand that it’s likely going to be wrong. And it’s usually going to be wrong. To the bad side, right, the forecast isn’t going to be as as rosy as whatever picture is being painted. So it’s always kind of looking at at the data and understanding that, number one, tomorrow’s not going to be the same as today. Number two, there are going to be some unknown events that happen that you’re not thinking about. In number three, there, there’s going to be likely more competition. So you really just have to make sure that you’ve got a good understanding of your historical data, but also know that you’ve really got to kind of be pretty pliable with what happens in the future.

And any pieces of advice for leaders that are in your position or any best practices that you found that have really been helpful.

Yeah, you know, I think I’m not sure that I’m in no position to give advice. I’m typically the one taking it. But we always are given. You know, I think right now, especially in the private equity world, there’s, there’s more more fundraising that’s going on then investing. So basically, these private equity funds are building up their, their fun levels, and they’re just, you know, that money is burning a hole in their pocket. And there’s so much pressure on portfolio companies, CFOs, and CEOs to get deals done. And I think, you know, I think those that can be patient and not necessarily jump on the first deal they see. And maybe, again, just do some of the things that we talked about is really, really take a step back and make sure they’re investing in the right company for the right reasons. I think they’re going to do better in the long run than somebody that just goes out and starts acquiring companies because their private equity sponsor told him, of course, and I think that is really beneficial, not just mid market companies, but also enterprise as well across the board. And for all the different companies that we even serve here courts, from entertainment, to healthcare law firms, you know, I think it’s really beneficial. So thank you so much for those insights that you provided. It was something new for me to listen to as well. And I’m sure our audience would agree. So thank you so much, again, for joining us. Thank you to everyone who has tuned in. If you do have any more specific questions for Dan, you want to do a deep dive more into the conversation. Don’t forget to ask any questions, make any comments down below in the discussion forum. Please be safe, be healthy. And thank you so much again for joining us for the Connect virtual CFO Leadership Summit.

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