Today more than ever, ASC owners are selling equity interests to doctors. These transactions should be win-win situations - they let physicians supplement their ever-decreasing professional fees and surgery centers crank up their case volumes by adding new utilizing physicians - but they must be carefully structured to navigate regulatory hurdles and to protect the ASC from a business perspective on a going-forward basis. These transactions also position ASCs for possible sales to national ASC companies. Here, I'll tell you how to design your transactions and agreements so that you stay out of regulatory trouble and still boost profitability.

Sell to several or a select few?
The first component of an equity transaction is the purchase, which can be handled in two ways: a "syndication," which is selling to several physicians at one time (typically with an offering memorandum) or "picking them off," which is selling to only one or two at a time. Each has advantages and disadvantages with respect to cost, timing and practicality.

Syndication:

• is possibly less drawn out;
• is more practical for larger ASCs (usually four or more ORs)
• and can be presented as "non-negotiable" (because you're delivering a bound offering memorandum that has the feel of a take-it-or-leave-it deal).

Picking them off:

• saves you the time, cost and tediousness of preparing a private placement memorandum;
• potentially lets you justify different percentages and even different prices if done over an extended time period (ASC Safe Harbor rules dictate that the terms of offering should be the same for all physicians)
• and translates to less negotiation with subsequent physicians (others fall in line after one physician has signed on).

How much and at what price?
Regardless of the method, priorities 1A and 1B are how much equity you want to sell and at what price you want to sell it for.

The amount of equity sold should be enough to make ownership meaningful to the new physicians while retaining control, reserving equity to sell to physicians in the future and maximizing the amount of interest you could sell to a national/regional ASC firm for a higher price. This means the physicians are usually restricted to minority ownership, while you maintain between 51 percent and 80 percent, depending on how many doctors you are bringing on.

There are a few ways to figure out an appropriate selling price for the equity (see "Determining Your Price"). One federal regulation to keep in mind: To avoid violating the federal Anti-Kickback Statute, the purchase price cannot be less than fair market value, which is the amount a buyer would pay to a seller during a transaction in which neither is under compulsion to sell or buy and in which no value is attributable to potential future referrals. The concern is that too low a price would be an improper inducement for the physician to utilize the ASC.

After the purchase
The second component of an equity transaction is the agreement that will govern the rights and obligations of the ASC owners thereafter. This document is critical to the success and protection of, and ability to later sell, an ASC. In a corporation, this document is called a shareholders' agreement; in a partnership, it's called a partnership agreement; and in a limited liability company, it's called an operating agreement.

If your facility has the option, an LLC is typically the best structure regarding liability and taxes. However, in some states, a limited partnership may be more advantageous, and others actually require a corporation for an ASC.

These four provisions are must-haves in your governing agreement:

• Equity transfer restrictions. This clause should restrict the transfer of equity by the physician-owners without prior consent from you or some or all of the physician-owners. Transfer restrictions should also ensure that all transfers are to physicians who use the ASC as an extension of their practices. Sometimes transfers are allowed to entities for asset protection or estate planning purposes, as long as the original physician is still in control.
• Solid redemption events (with a reasonable redemption price). One of the biggest pitfalls to avoid is the "inactive physician owner." Traditionally, governing agreements have allowed ASCs to redeem the equity upon a physician's death, disability or retirement. However, ASCs would be well served to broaden the events that could result in a redemption of the physician's equity. In particular, it could be wise to adopt as a redemption event failure to meet the one-third use/revenue tests from the ASC Safe Harbor.

Without a contractual obligation to sell the equity in such a case, profit distribution to utilizing physicians will be diluted. In addition, the ASC must be able to buy back the equity for the right price. If a physician dies, becomes disabled or retires, the redemption price is usually determined by the same or similar formula as the buy-in formula. However, if the redemption occurs because, for example, the physician moves out of the area, fails to meet the one-third test or violates the restricted covenants, you might want to consider a 25 percent to 50 percent discount. You could also compute the price based on post-departure earnings - but not on prior earnings; purchase prices based on historical earnings may be inflated because they contain the facility fee of the departing physician. You could also set an annual cap on the amount paid out in redemptions to ensure that paying the redemption price is not overly draining.

• Control provisions. If the agreement is "silent," then the person(s) holding 51 percent of the equity controls the ASC. The document could also provide that you retain control, regardless of how low your ownership goes. If you are sure you will always retain control, you might also want to include a minority protection clause that would require at least some of the minority owners to approve certain major moves, such as the sale of the business, capital calls, transactions with parties related to the founder, admitting new physician owners or borrowing/spending in excess of a set threshold.
• Non-compete restrictions. Another critical term is the restrictive covenant. This will prohibit physicians from owning an interest or having any financial relationship with a competing ASC. You can't, however, prohibit them from using another ASC. These restrictions will last while the physician is an owner in the ASC and for a period of time (two years, for example) thereafter. The enforceability of these provisions is entirely state specific, but in all cases the geographic area and duration must be reasonable.

Other provisions to include could cover:

• capital calls (the requirement to put more money in pro-rata if the ASC needs it)
• personal guarantees of third-party debt and leases (the more physicians have invested, the more committed they'll be to the ASC's success)
• right of first refusal (physicians can offer their interest to a third-party physician if they first offer to sell it to existing owners) and
• "drag along" rights for the founding owner (you can compel the minority owners to sell some or all of their equity to a third-party as long as they get the same price as the founder in the event of the ASC's sale).

The time is now
Selling equity interests in your ASC to physicians who will use the facility can help you ensure that your ASC is appropriately utilized, fiscally strong and marketable. In addition, a good operating agreement can make your ASC desirable to national/regional ASC companies who may want to buy your facility.