12 questions to ask potential “strategic” ASC corporate partners

It is a seller's market for ASCs. Over 20 ASC management companies and many local hospitals are competing to invest in surgery and endoscopy centers because they are the "low cost, high quality providers".

While the ASC management companies will almost always place a higher value on an ASC than hospitals do, a strategy that has proven to be successful is to first negotiate a deal with an ASC management company to establish the highest possible value for the ASC, then let your corporate partner bring the hospital in as a minority, non-managing partner. This is "the best of both worlds" strategy: an ASC management company partner that has expertise in managing ASCs with the goals of increasing profits and distributions, and a hospital partner that has better paying contracts and can generate referrals.

Caution: it is critically important to make sure that the hospital you intend to partner with will share contracts and referrals with your center before you agree to partner with them!

In most cases there will be several ASC management companies that stand out as potential "strategic" corporate partners for your center based on the needs of the center, the goals of the physicians, and the expertise required to increase center profits. While several companies may be interested in investing in your center, it is important that your corporate partner bring more than just cash to the table. Partnerships fail because of mis-alignment of goals and/or lack of company expertise to help the center grow and increase profits. In fact some partnerships have resulted in decreased distributions due to lack of adequate management by the ASC corporate partner. So the first goal of physicians wishing to sell an interest in their center should be to identify several ASC management companies that can help their center grow and become sustainably more profitable. This proven expertise is what a "strategic" corporate partner should bring to the table.

Once the best candidates to be your corporate partner have been identified, their interest must be solicited and their appropriateness as your partner proven. Here are 12 questions that will help you learn what to expect from a proposed partnership:

1. Our center is seeking a strategic partner that can help build our ASC business and make it substantially more profitable. What strategic advantages do you bring to the table and how will these benefit our center and the physician-partners? What are your company's proven strengths and your annual "same store growth record"?

2. What is your business plan for our center? What are your expectations from your proposed investment in our center and how will these benefit the physician-partners?

3. [If your center is an out-of-network (OON) ASC]: Our ASC is heavily OON. How will you manage getting us in-network without a big drop in revenue and profits?

4. What contracts do you currently have in our market and how will these benefit us?

5. What is your philosophy and track record regarding partnerships with hospitals? Will you be interested in bringing in a hospital as a partner in our center? How will this benefit our center?

6. How will you value our center, and from what date will the valuation be determined? How will you value out-of-network revenue? How will our liquid assets and A/R be treated in the valuation?

7. If the physicians have been receiving a management fee, and/or buying supplies in advance to take advantage of buying opportunities, how will the management fees and/or value of advance purchases be reflected in the valuation of the center?

8. What management services will you provide and how will these benefit our center, and at what cost? How will your management services reduce our expenses? What bottom line growth, after payment of management fees, have your centers experienced?

9. What will you do to increase distributions to the physician-partners? When do you expect to see improved financial results?

10. How and when will new physician-partners and new services be added?

11. What control will the physician-partners have? How will the ASC be governed and how will decisions be made? What decisions will be left up to the physician-partners?

12. What will be the timetable to close once we have signed your LOI?

Responses to the above questions should be provided in writing by the companies being solicited so that the physician-partners have a record of what is presented during the meetings leading up to the signing of an LOI. Prior to signing a LOI, we strongly recommend that the sellers discuss the experience of other physicians who have partnered with the companies under consideration to confirm that the promises made before the LOI is signed were met after the deal was closed.

Jonathan C. Vick, the founder and President of ASCs Inc., has assisted in development, merger, and strategic acquisition transactions for over 500 physician-owned ambulatory surgery (ASCs), endoscopy centers (ECs) and surgical hospitals since 1984. He founded and was a principle shareholder of SurgiCenter Development Corporation (90 ASC partnerships) in 1984 and Endoscopy Center Affiliates (20 Endoscopy Center Partnerships) in 1994. He participated as a corporate partner for a national network of surgery and endoscopy centers that was acquired by a national ASC management company in 1995. Mr. Vick has a B.A. from Hamilton College and an LL.B. from La Salle University. He has extensive experience in ASC and EC sales, development, business planning, operations, valuations, and strategic mergers & acquisitions. He can be reached at 760-751-0250 or at e-mail: jonvick2@aol.com.

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