ASC owners ready to sell: Are you putting yourselves at risk?

Ambulatory surgery center owners looking to sell their centers benefit from working with a licensed investment banker with a background in healthcare.

ASC owners put their investment at risk when working with unlicensed intermediaries, especially if the sale becomes a stock sale—a stock-based transaction — versus an asset sale — the purchasing of tangible property, including the ASC's good will.

"Typically ASCs aren't big industrial companies where owners have millions and millions of inventory and varied, expensive assets," says Gregory Seigel, a tax-attorney and securities-licensed investment banker with Seigel Advisory Services. "The primary value of the surgery center is a large base of patients that need surgery, and the goodwill associated with it. The ASC's goodwill is often its most valuable asset."

Many ASCs are structured as asset sales; in those situations, buyers are able to cherry-pick which assets they want to purchase. But healthcare businesses are more regulated than other businesses and there are additional considerations for structuring the deal: certificate of need, intellectual property associated with the business and third-party payer contracts.

"When you sell the ASC, you may be unable to assign the payer contracts to the new owner," says Mr. Seigel. "There are license and contracting issues that often prevent the buyer from purchasing payer contracts outright. In many states, you may not be able to transfer the CON by just selling the assets. Essentially In these situations, you would need to sell the security—the stock of C-Corporation or the membership unit of an LLC, for these ASC transactions."

The attorneys structuring the ASC transactions can potentially wait until the last minute to decide whether the transaction needs to be structured as a stock. Once the transaction is deemed to be a stock sale, the investment banker's license becomes critical. If an ASC owner pays an unlicensed intermediary a success fee based upon the sales price of the center, the intermediary is in violation of state and federal securities laws.

And there are consequences for the seller.

"Typically you would think any violation of securities laws would be the broker's fault because the broker should have known better. But an enforcement action could be brought up against the ASC owner by both state and federal securities agencies for aiding and abetting violations of securities laws," says Mr. Seigel.

The second issue can occur when ASCs form an LLC. Any time the ASC physicians form an LLC, they are issuing a security with the ownership unit under the security. Typically the ASC owners are able to issue these securities under a federal and state exemption.

"It's very labor intensive and costly to go through the process, so some smaller companies will often utilize the exemptions," says Mr. Seigel. "If the governing securities agencies find you are paying a non-licensed investment banker a transaction fee, they could call your exemption into question."

The biggest risk for sellers of an ASC is that if the seller pays an unlicensed investment banker, the buyer could rescind and cancel the sale. Buyers can use the payment of unlicensed investment bankers as pretext to cancel the whole deal, and in some states the buyer can rescind the transaction at any time because the sellers paid someone they shouldn't have.

"Then you're in a situation where the buyer purchased a business and then tries to find a way out of the deal," says Mr. Seigel. "A physician doesn't need their investment banker putting them at risk."

Licensed investment bankers must have an affiliation with a broker/dealer and keep every communication with clients for three years. A variety of legal counsel must review communications to make sure the deal is in compliance with securities laws.

"The licensed investment bankers are spending significant money and resources by to ensure they are in compliance with all federal and state securities laws," says Mr. Seigel. "Affiliating with a broker/dealer without a license is like seeing a physician who doesn't have malpractice insurance. At the end of the day, I want to know my physician has malpractice insurance."

More articles on surgery centers:
51 things to know about physicians today—Compensation, employment & where young physicians are headed
The makings of a great ASC administrator: 4 fundamental skills
How to overcome 5 big ASC supply chain headaches & leverage partnerships for the future

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