With the economy in a tailspin and physician-ownership coming under increased scrutiny at the state and federal levels, has there ever been a better time to consider partnering with a corporate entity or hospital? The first steps you can take to prepare your center for sale are to restructure the ownership through syndication and part ways with physician-partners who aren't contributing to the growth of the business.

Who stays, who goes?
The ASC partnerships of yesterday had 20 to 50 physician-partners, very few of whom were committed to the ASC and used it exclusively for their cases. Today, successful ASC partnerships have fewer owners, each with a much stronger commitment to the center. Don't view ASC ownership as a retirement vehicle for those physicians who got in on the ground floor of the center and have now slowed down or stopped doing surgery. Instead, constantly reevaluate the ownership structure of your facility to reflect its current users; this will help keep the incentives of the owners properly aligned to maximize the ASC's value.

Use current utilization reports as a starting point for determining active users of the center. These reports reflect not only the cases being done in the center, but also the total outpatient cases each owner is performing (including cases done in a hospital or another ASC). From a legal perspective, you have to fulfill the one-third test, which means for a physician to be considered an owner, one-third of his income must be derived from performing surgery, and at least one-third of the outpatient cases he does must be performed at the center in which he has an ownership stake. While this rule is a good starting point, it shouldn't be the sole gauge of a surgeon's commitment. After all, you could have a surgeon who meets the one-third test at three different ASCs, but that doesn't mean he's going to be fully committed to your particular center. The most successful ASCs have exclusive commitments from physician-owners.

Once you identify owners who are performing few or no cases at your ASC, there are a few mechanisms you can use to restructure the ownership. For instance, the "no cause" termination provision in an ASC operating agreement can enable a supermajority of owners (usually 65 percent to 80 percent) to remove an owner for any or no reason. If your operating agreement doesn't contain this provision, you might want to add it. Otherwise, your only other mechanism is the squeeze-out merger (see "The Anatomy of a Deal" on page 8), a difficult and expensive proposition that should only be used as a last resort. In the end, fairness and group persuasion are the best ways to convince under-utilizing partners to sell some or all of their shares. There are two ways to redeem the outgoing physician's shares.

• The ASC can purchase the shares from the selling physician. When the ASC is buying back the shares, it typically holds them until a new physician-investor is identified, and then the ASC sells the shares to the new physician.
• A new physician-investor can purchase the shares directly from the selling physician.

Adding new blood
New cases are the lifeblood of a successful ASC, and finding new surgeons who'll commit to the facility and replace under-utilizing physicians is the key to boosting your caseload. Look to existing specialties and the partners of existing physician-investors; they should already be familiar with your facility and board members, and might be more open to joining you. Once you've exhausted those targets, move to competitors of existing partners. This can be a controversial move and a tough sell, but your competitors are very high-value targets.

The number of prospective physician-owners you should target depends on the size of your center. Large ASCs (those with three to five ORs, for example) should make prospecting for new surgeons an ongoing project and give their administrators annual recruitment budgets and targets. New, unattached surgeons are much more interested in a constantly evolving surgery center than in a static one. Age is another factor to consider when recruiting new surgeons. The younger the investors, the better, particularly if you're considering bringing in a corporate partner down the road. ASC companies tend to pay the highest multiples when the average physician-owner's age is in the 40s, rather than in the 60s.

Selling and pricing the shares
After you identify some hot prospects and convince them your ASC is the perfect investment for them, the next step is determining who'll sell the shares to the new physician-investors. Bringing in new physicians (and their cases) is 100 percent accretive to an existing owner if that owner doesn't have to give up any shares, so you've got to be careful to structure the deal fairly and prevent internal turmoil among your current investors. Here are a few options for handling this dilemma.

• The ASC itself can hold a certain number of shares (gained from buying out former partners) and sell those shares to new partners.
• You can use a pro rata dilution mechanism whereby each existing partner is diluted based upon his ownership percentage.
• You can formulate a prescribed dilution strategy and incorporate it into the operating agreement to determine ahead of time who'll sell what to whom. For example, you may include a provision in your operating agreement that requires existing partners to be the sellers to new physicians in their own practice.

Once you've determined who'll sell the shares to your new physician-investors, you must carefully determine the price at which the new docs will buy in. The law requires that you sell shares to prospective physician-investors at fair market value. The rule of thumb for most syndications is three times the trailing 12 months' cash flow of the ASC. For example, if the ASC is generating $1 million in cash flow and has no debt, the safe price is probably somewhere close to $30,000 per 1 percent ownership interest (3 x $1M x 1%). As long as the price can be justified as fair market value, the ASC should be protected from any regulatory inducement challenge. I strongly suggest you retain competent legal counsel when doing any syndication to ensure you're pricing shares fairly.

Financing for syndication
Getting a new physician to write a check to you and your partners to buy into your ASC is difficult at best, especially if he's the hotshot young physician in town still paying off his student loans or raising his young family. However, even in these trying economic times, banks are ready, willing and able to lend to physicians for buying into ASCs. Regional and local banks are particularly keen to lend to physician-investors, since they're always looking to establish long-term banking relationships with physicians in the community. "There are a number of financing options available," says Eric Kelly, assistant vice president of Regions Bank in Austin, Texas, "but a full banking relationship is usually a prerequisite, and both the ASC and the surgeon must be financially qualified."

The perfect situation is a bank lending the new physician 100 percent of the purchase price at a low interest rate, and without having to provide any security for the loan. Believe it or not, this type of financing is still out there if you know where to find it. However, if the new physician can't demonstrate the appropriate financial strength to obtain such a loan, local banks should still be willing to extend the financing, but with additional constraints, such as higher interest rates and collateral to secure the loan.

When financing the purchase of shares to a new physician-investor, you and your existing partners can't have anything to do with the process. You can't lend the money to the new physician-partner, guarantee the loan or assist with the financing in any way. Government regulators can view such involvement as an inducement.