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Legal Update
Simultaneous Syndication and Sale
, Jerry Sokol, Joshua Kaye
Publish Date: October 10, 2007

Corporate investors continue to value surgical centers at a high multiple of profits, but they're usually skeptical of transactions when too few utilizing physicians own equity. This can spell delays and additional expenses for the founding physician, who first has to sell a portion of his ownership interests to utilizing physicians before he can turn to the more lucrative sale to a corporate buyer. But what if you could collapse the syndication of equity interests to physician-utilizers and the sale to a corporate investor into a single transaction?

Art of the Deal

  • You're the founding physician of a surgical center with $1 million in earnings.
  • Here's how you could sell shares to surgeons and a corporate investor at the same time.

You could bring in new physician-owners by selling them interests at $30,000 per percentage point ($1 million x 3 multiple = $3 million; $3 million divided by 100 = $30,000 per 1 percent)

Assuming the corporate buyer pays a 6 multiple, you could then sell the remainder of your interests to a corporate investor at more than $60,000 per ownership percentage point ($1 million x 6 multiple = $6 million; $6 million divided by 100 = $60,000 per 1 percent.)

Caught in no-man's land
Physician syndications can be headaches. Surgeons may be unwilling to part with the considerable cash they'll need to buy into a mature ASC. That can result in a great deal of anxiety and tension between the doctors desiring to buy in and the founding physician, who views the physician syndication as necessary in order to complete the more profitable deal with a corporate investor.

These concerns are exacerbated by the fact that it's inappropriate from a regulatory perspective for either the ASC or any physician who'll continue to be an investor in the ASC to loan a meaningful amount of money to another physician to acquire his interest in the ASC. The founding physician also has no assurance that the transaction with a corporate investor will be consummated, even though he diluted his ownership position - and his right to receive distributions - by bringing in new physician-owners.

Syndicate and sell at once
You can alleviate many, if not all, of these concerns when the physician syndication and sale to a corporate investor occur simultaneously.

There are two types of transaction structures for a simultaneous physician syndication and sale to a corporate investor. The structure you choose will likely depend on whether your existing ASC is operated through a limited liability company, partnership or an "S corporation."

  • LLC or partnership. If a limited liability company or partnership is involved, then the corporate investor can purchase an equity interest directly in that company.
  • S corporation. An ASC operated through an S corp. poses somewhat of a problem because a corporate investor can't be an owner of an S corp. In that instance, the S corp. would transfer all of the ASC assets into a newly formed LLC in exchange for all of the ownership interests of the new LLC. The corporate investor would then purchase a portion of the ownership interests in the new LLC.

One of the most important issues for you to consider in selling interests to physician-utilizers is the purchase price. The purchase price is typically based on a multiple of the ASC's earnings before interest, taxes, depreciation and amortization, or EBITDA. A common misperception among ASC physician-owners is that they should be able to sell interests to physicians using the same multiples that national ASC companies are paying. You must distinguish the valuation ASC companies use (often a 6 multiple) from the lower multiple an ASC (or physician-owner) should expect to receive when selling interests to an individual physician. This distinction is key to a simultaneous physician syndication and sale to a corporate investor, because it can let the physician-utilizers acquire or increase their ownership interest in the ASC with little or no money out of pocket.

Let's say an ASC that's currently owned by one founding physician has $1 million in EBITDA. A fair market valuation confirms a 3 multiple for a minority, restricted and illiquid equity interest. The founding physician could then bring in new physician-owners by selling interests to them at $30,000 per percentage point ($1 million x 3 multiple = $3 million; $3 million divided by 100 = $30,000 per 1 percent). Assuming the corporate buyer pays a 6 multiple, the founding physician could then sell the remainder of his interests to a corporate investor at more than $60,000 per ownership percentage point ($1 million x 6 multiple = $6 million; $6 million divided by 100 = $60,000 per 1 percent). Note that the purchase price valuation is often reduced by the ASC's long-term debt.

The new physician-owners could offset a portion, if not all, of the buy-in price they paid by selling a portion of the equity interests that they're acquiring to the corporate investor as well at this higher purchase price multiple. If the founding physician will no longer be an owner in the ASC (he's retiring, for example), he can also lend money to the new physician-owners to help facilitate their buy-in. While a difference in the multiples has clear justifications, consult an independent third-party appraiser before you sell equity interests.

The ongoing relationship
After consummating the transaction, the founding physician may or may not be an owner in the ASC, so it's critical that the ASC have a governing document (such as the operating agreement) that addresses important issues among the remaining physician-owners and corporate investor, including redemption events, decision-making and restrictive covenants. These issues are typically negotiated during the transaction. The founding physician must often quarterback the negotiations between the corporate investor and the new physician-owners to ensure that this process proceeds smoothly and remains on track.

Simultaneous physician syndications and sale to corporate investors have emerged as an attractive transaction structure. Be sure to consider the myriad federal and state laws that impact these transactions.

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