If the surgery center’s debt is higher than its tangible assets and not making a profit, then the center is in a negative state. “If you aren’t making a profit, the center’s tangible assets are worth less than their debt then the center is not worth much,” says Blayne Rush, president of Ambulatory Alliances. “Depending on who comes to the table as an investor — whether it is an individual doctor, group of doctors or a management company — and depending on the value of the intangible assets that the new investors bring to the table — such as their ability to recruit new physicians, their reputation and ability to manage people and expenses — I would argue that you should be open to paying them in a management agreement.”
In this scenario, the management company would sign on as a minority owner and become partially responsible for the center’s debt. “The management company would get equity, sign up for the center’s debt, and in some situations they would sign a separate management agreement,” says Mr. Rush. “Since the shares of the center are worth less than zero, in essence you would be paying them to become part of your center because they would receive payment through the management agreement in addition to any equity.”
The management agreement should be separate and would be appropriate as long as it is at fair market value and they actually manage the center. “The center pays their management company for the management agreement, and the company also takes on minority ownership of the ASC,” says Mr. Rush. “That’s a good business decision if you owe more to the bank than what your equipment and other tangible assets are worth; the company can help you manage the facility and make it profitable.”
In some cases, Mr. Rush has seen where the corporate partner or physicians will come in and offer to buy the center with the stipulation that the day after the sale closes there will be a capital call for a certain amount of money. “In this scenario the management company takes on the debt, the new partners and the original physicians invest more money into the center and then the management company gets paid the management fee for their additional management agreement,” says Mr. Rush. “The physicians must to put more money into the center to keep it afloat and cover the expenses.”
The entire context of the agreement is within fair market value because the center is paying a corporate partner or physician to manage the facility through management contract; the corporate partner also happens to own a minority share in the facility. Owning minority stake in the ASC means the management company and the physicians have “skin in the game” and will be motivated to turnaround the center.
“The physicians still own the bulk of the center, which should drive them to be more involved,” says Mr. Rush. “Both sides want to see their investment grow. They don’t want their dollar to be the same in five years; everyone has an incentive to grow the practice.”
Even though the physicians are selling a small portion of the practice, they will eventually gain more as it grows. If the physicians retain 66 percent of the center, they’ll still have that same portion in five years — but it will be worth more.
“The pie gets bigger for everyone,” says Mr. Rush. “You’ll have the same percentage of a bigger pie, which is a bigger value. The management company will help expand the whole business value.”
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