1. Minority partnership. “In bringing on a partner, physician owners are mostly concerned with losing control of the ASC,” says Mr. Hall says.
Tthe owners’ biggest issue is governance and control related issues, says Kenneth Hancock, president and chief development officer of Meridian Surgical Partners.
“ASC owners like making all of the decisions and don’t want to give that up,” Mr. Hancock says.
Jon Vick, President of ASCs Inc. agrees
“The main advantage of a minority partner is the retention of control and a greater portion of the cash flow while accessing the corporate partner’s expertise to manage, contract, increase revenues and decrease expenses, thus adding to the bottom line,” he says.
In addition to the control issues, physician owners often are concerned with the associated distribution decreases.
“As could be expected, physician owners do not always want to share a majority of the profits,” says Mr. Vick. “However, they can benefit from a minority corporate partner through that partner’s management expertise.”
In addition, a minority partner may make more sense strategically for an ASC.
“ASCs in a growth mode may have different needs and may look for minority partners to assist with growing the business to position for a future sale to either another management company/group or a buy-up from the minority partner,” says Mr. Hancock.
Also, many corporate partners prefer to purchase a minority interest because it aligns interests during a growth phase of the business. The buy-in of a minority partner will generally be at a lower valuation, and thus lower purchase price, than a majority buyer. “Expect multiples in the range of four to five times EBITDA (earnings before interest, taxes, depreciation and amortization) from minority buyers who have no current or future control provisions,” says Mr. Hancock.
2. Majority partnership. Perhaps the biggest advantage of a majority partner is the higher multiple of EBITDA offered and the ability of the owners to take more money off the table.
“A majority partner that owns other ASCs, has the leverage to negotiate better reimbursement contracts and vendor relationships and the experience to cut costs and increase revenues substantially,” says Mr. Vick.
A majority partner can bring necessary capital to the ASC for growth and expansion.
“Majority buyers looking for control and ownership in excess of 50 percent are typically well capitalized with private equity backing or publically-traded companies,” says Michael Weaver, vice president of development at Symbion. A majority or minority interest management company may be able to keep the ASC’s pro rata distributions growing so that those distributions may return to their previous levels within three to five years but at a minimum should add certain value to the ASC.
Physician owners worried about losing all of their control can allay some concerns through a well-drafted operating agreement.
“A well-drafted operating agreement will allow physician owners to retain certain super-majority voting rights on certain key issues,” Weaver says.
Note that the buy-in of a majority partner will generally be at a higher valuation, and thus purchase price, than a minority buyer.
“It’s important that these companies be in a position to consolidate partnership revenues from an accounting perspective and they will pay a premium for that right,” says Mr. Hancock. “Expect multiples in a range from six up to seven plus times EBITDA.”
3. Hybrid approach. A two-step hybrid approach is being introduced in certain ASC acquisitions, says Mr. Hall. Step one is when a company invests as a minority partner in an ASC. The ASC is usually a new facility, he says.
Typically, step two is when, upon meeting certain predetermined benchmarks in line with OIG fraud and abuse guidelines, the corporate partner exercises its option to become a majority partner at the agreed to buy-on formula, says Mr. Weaver.
“This bifurcated model allows both the buyer and seller to share in certain risks,” he says. The physician owners benefit from the corporate management’s experience, while providing the physician investors an opportunity to sell a significant interest to the management company once the ASC has turned a profit.
— Ms. Kulvin (mrbones@the-beach.net) is a freelance writer based out of Surfside, Fla.
