More corporate partners are throwing more money at more surgery centers than ever before, which should come as welcome news to surgeons looking to convert part of their investments into cash. The surgeons and investors we talked to say there's never been a better time to do so. Why?

• The competition is fierce. Corporate partners clamoring to own a piece of surgical facilities are sprouting like dandelions. Chances are, one of the nearly 40 players has already come calling with offers to improve the financial performance of your center or to facilitate an exit strategy.

"If you want to sell all or part of your facility, you can essentially have an auction," says Mark Nelson, director of marketing and sales for Health Inventures, a surgery center development, management and ownership company. "Here's our project. Here are our financials. Submit your best bid."

By getting competing bids, a seller can increase his selling price by at least one-half to one multiple over what he would have gotten otherwise, says Jon Vick, president of ASCs, Inc., a consulting firm that helps physicians find the right corporate partners and negotiate the best deals for their surgery centers.

• It's a sellers market. Today's climate greatly favors physician-owners who want to maintain the control that spurred them to build their own surgical centers in the first place, yet allow a partner to take on some of the risk and manage the day-to-day operations. The crowded playing field has led to more companies taking minority equity positions in the centers in which they invest.

"They don't want to, but the competitive nature of the market has forced even the big companies to consider taking a minority interest rather than stick to the 51-percent-or-nothing mantra," says Mr. Vick.

Even publicly traded companies required by law to be majority owners are being flexible. A doctor-friendly contractual arrangement called drag-along rights lets the partner first buy, for example, 30 percent of a surgery center and later acquire 21 percent at a new (and probably higher) price.

• The multiples are soaring. The multiples companies are paying for a piece of high-cash, high-volume centers have never been higher. Not long ago, corporate partners valued surgery centers at four or five times EBIDTA, an approximate measure of operating cash flow that stands for Earnings Before Interest, Taxes, Depreciation and Amortization. The multiple has swollen to 7.5 times to eight times EBIDTA. Surgeons can recover their sweat equity by getting a sizable advance on profit distribution - taxable as a capital gain (about 15 percent), not as ordinary income (about 35 percent) - and still own a portion of their investments.

"Young corporate partners that have gotten financing are more willing and more likely to pay higher multiples because they want to put pins on the map," says Mr. Vick. "They want to deploy their capital and get their company cash flowing."

The GI Center sells 51 percent
When Bergein "Gene" Overholt, MD, and his four partners opened the country's first state-licensed endoscopic ASC in 1986, they went at it alone. Seven years later, with the complexities of running a surgery center growing, the threat of regulatory prohibition looming and the hole in their exit strategy gaping, the Knoxville, Tenn., GI group decided it was time to team with a corporate partner.

As Dr. Overholt puts it, "The business of running an ASC is more complex than it would seem on the surface. Plus, we wanted an exit plan and financial protection in case physician self-referral was ever deemed illegal."

Gastrointestinal Associates and its nine physician-owners joined forces with AmSurg in 1993. Together, the nine GI docs own 49 percent of the shares; AmSurg owns 51 percent, having bought into what is widely considered the busiest GI center in the country with a cash-and-stock (mostly cash) deal. In the parlance of corporate partnerships, the nine GI docs "took some of their money off of the table," a practice in which physician-owners withdraw part of their equity now instead of all of it later when they retire and sell back their shares to new partners. Put another way: It's an early return for the capital that docs invested and the risk they undertook.

"It was a significant kind of money that reflects the investment that we put into this over the years," says Dr. Overholt.

The tradeoff for the upfront payment: smaller dividends, a silver instead of a golden parachute when doctors exit the partnership and, sometimes, diminished control and authority. Even though AmSurg owns 51 percent of the ASC and controls two of the four seats on the operating board, it ceded day-to-day control of the facility to the doctors. "We control the daily operations: the hiring, the firing, the purchase of supplies and equipment. In essence, we control our own center," says Dr. Overholt.

AmSurg's contribution as a managing partner has been significant, says Dr. Overholt. A few examples:

• Purchasing power. Corporate partners buy in volume and employ procurement specialists, so they can negotiate better rates on insurance contracts supplies, equipment and services than any single center. Gastrointestinal Associates was spending $2,500 per month on laundry. AmSurg renegotiated a deal that saved around $800 per month. "AmSurg does a better job on those things. They focus on that. We don't have the time and experience that they have," says Dr. Overholt.
• Overhead sharing. AmSurg absorbs some of the time and money GI docs must spend on their general practices to run an endoscopy unit. "A percentage of that time and effort is transferred back to our partner," says Dr. Overholt.
• Benchmarking. AmSurg breaks down in line-item detail the average revenue per procedure and expense per procedure so that Gastrointestinal Associates can compare itself to AmSurg's 75 (out of 140 total) other GI centers. "If we're out of line, we know we're out of line," says Dr. Overholt.
• Buyback clause. When a physician-owner retires, the remaining partners will buy his shares for a multiple of two times earnings.
• Development. Corporate partners can help with development, too. Dr. Overholt's group is about to open two GI centers on opposite sides of Knoxville. AmSurg helped with the development, planning, certificate of need, licensure and certification. "They help get new centers operational as quickly as possible. Their experience shortens your timeline," says Dr. Overholt.

Is a corporate partner for everybody? Of course not. Just as corporate partners generally aren't interested in single-specialty ophthalmology or plastics centers, some surgeons aren't built for corporate partnership. "If (a surgeon) wants total, absolute, dictatorial control of all aspects of the center from A to Z, then he should do it alone," says Dr. Overholt. "But if you are willing to share and capitalize on the experience of the corporate partner at the cost of sharing the revenues, then you're better off with a corporate partner."

A model for every surgery center
About 1,000 (1 in 5) of the 4,900-plus Medicare-certified ASCs have taken on a partner, says Mr. Vick. It's estimated that about 200 (1 in 5) of the 1,000 hospital-physician joint ventures are three-way deals involving a corporate partner as well. In stark contrast to only a couple years ago when hospitals resisted the movement toward physician-run surgical facilities, hospitals increasingly are the ones initiating joint-venture projects, says Caryl Serbin, RN, BSN, LHRM, president and founder of Surgery Consultants of America, Inc.

Corporate partners come in all shapes - majority-owned, minority-owned and management-only - and sizes. Some are publicly traded (like AmSurg, Symbion and HealthSouth), others are privately owned (like ASCOA, SevenD and Health Inventures). They'll court you in good times and in bad, in sickness and in health.

Some are attracted to thriving multi-specialty centers and to startups, while the buy-low, sell-high turnaround specialists willing to roll up their sleeves are drawn to down-and-out centers.

"We search for a grain of quality - a beautiful facility with a messed-up partnership, a couple of class-A doctors or a one-hospital town market with no managed care. We walk away when none of those things are available to us," says Tom Mallon, CEO of Regent Surgical Health, a manager and partner in ASCs and small hospitals.

Here's a brief look at the three corporate partner models:

• Majority-owned model. This model is best suited to established, multi-group, multi-specialty centers whose physician-owners are looking to pocket 50 percent to 70 percent of their investment and don't mind giving up control. The investment community considers such deals to be good long-term holdings. This model lets older surgeons to retire and younger surgeons buy in with ease.
• Minority-owned model. This model appeals to physician-led ASCs who haven't reached their potential. A corporate partner will buy between 10 percent and 30 percent of a surgery center. The center will use the investment to pay down debt, purchase new equipment or buy out existing docs, not to cash docs out. Some partners insist that they must manage your facility as a condition of minority ownership.
• The management-only model. This model, in which the corporate partner serves as a development consultant rather than as an investor, is popular with single-specialty groups interested in getting up and running and hospital-outpatient departments looking to turn (or flip) their HOPD into a joint-venture with physicians. Management deals might run two or three years; the partner likely won't have an equity interest in the project.

While some say the demand for professional services companies is diminishing, others point to the wave of hospitals that passed on the outpatient market 10 years ago and now want to partner with physicians on second- and third-generation projects. To them, the management-only model remains in good health. "I have noted a more positive attitude of hospital executives over the possibility of JVs. Both the physicians and the hospital partners seem to be more educated about the process," says Ms. Serbin.

So whether your surgical center is on the drawing board, on life support or on fire, there's a corporate partner eager to talk to you.

"We see a very defined market for each type of partnership model out there. Centers lend themselves to one of the models," says Mr. Mallon. "There's a place for all three in our industry. Everybody is busy, which is a great sign. Nobody is sitting on their hands, wondering what to do next."

Cutting bodies, counting beans
Tony Kaczmarek, MD, went to medical school. He likes to cut. Bodies. Ann Deters, MBA, CPA, went to business school. She likes to count. Beans. Together, the urologist and the entrepreneur own and operate Physician Surgery Center in Rolla, Mo. The multi-specialty ASC turns 3 years old in October and by all accounts is a shining example of how a corporate partner can make a surgeon who doesn't know a pro forma from a prolapse look like a captain of industry.

"God's given us all gifts. We should be able to identify which ones we have," says Dr. Kaczmarek. "For me, it's not managing a surgery center. Taking care of patients? Yes. Managing a business? No. Physicians are notoriously poor business people. I would not do a surgery center without a managing partner. When we were getting our group together, we didn't even have skills to write the pro forma."

Ms. Deters makes the same point, but in more delicate fashion. "Surgeons went to medical school to become good surgeons. Management company executives went to business school to become good business managers. The best centers are those that allow each to focus on their strengths and provide their top-notch service," she says.

Ms. Deters is solely concerned with the financial viability of the business, the cash flow, the cost versus revenue, the banking relationships and whether the insurance contracting makes sense, she says.

The six founding physicians are shareholders in Physician Surgery Center: two urologists own 16.22 percent, one ENT owns 16.22 percent, two ophthalmologists own 24.32 percent and one general surgeon owns 10.81 percent. At 32.43 percent, Ms. Deters' company, SevenD & Associates, is the biggest shareholder, having paid with equal parts sweat equity, venture capital and management acumen. SevenD worked 18 months to develop the facility and, as is common in start-ups, has stayed on to manage it.

The surgeons actually pushed for SevenD to have an even greater share of the equity, figuring the more skin it had in the game, the more it would control costs. "If you give your corporate partner a bigger stake in the shares of the surgery center, (it's) going to have more incentive to drive down the costs of managing the center," explains Dr. Kaczmarek. "Surgeons have big egos and we think everything we do is correct. You have to have that independent third-party person who understands business."

SevenD helped with the construction and equipment expenses and initial funding of cash flow by contributing a pro rata share of the costs, reducing the cost and risk to the physician partners.

Thanks to its partner, Physician Surgery Center doesn't have any transcription costs and can bill a case minutes after it's completed. Using an operative note system SevenD constructed, surgeons dictate their op notes into a voice-automated system upon finishing a case. The system translates the dictation into a templated op note staff can later modify on screen.

Dr. Kaczmarek had an epiphany of sorts at a recent urology conference in Dallas when he discovered how many of his contemporaries had embraced corporate partnership. "Many more doctors are more supportive of the idea of having a managing partner to free up time for us to do what we're trained to do. Which is see patients, do operations and take care of patients."

Less ownership, more worth
Not long ago, surgeons resisted the idea of surrendering part of the control and part of the profits to a third party. But that resistance is beginning to wane as more physicians understand that a good partner brings considerable value to the table and can increase dividends in the end. And that leads us to the part of corporate partnership that might seem too good to be true: Many ASC owners can sell an interest in their center and enjoy greater cash flow after the transaction than they did before.

Take the case of the partial liquidation, in which reducing your ownership (sell 50 percent) improves your worth (get two times original equity back and still own 50 percent). Wayne Lee, vice president of facilities development for Health Inventures, explains how this might work.

Say a surgeon invested $50,000 in a startup five years ago. He's got an average cash-on-cash return of 30 percent, or $15,000 per year, which means his $50,000 investment is worth $75,000. Based on the profitability of the surgery center after five years, his original $50,000 investment has appreciated to $100,000. He could sell half that $100,000 interest to a corporate partner, get $50,000 back, and still own 50 percent of the center and receive distributions.

"The doctor is still enjoying the benefit of all the risk he took on the front end because the facility is still there," says Mr. Lee.

Corporate-managed centers are thought to be more profitable than independent centers. Mr. Vick claims ASCs with corporate partners have higher utilization rates and average more than $300 more revenue per case than independent ASCs. Facility fees collected at corporate-managed ASCs average $1,406 per case compared with $1,105 per case at independent ASCs. This difference of $301 per case results in additional profits of more than $720,000 per year in a 200-case-a-month ASC. Partners generally do a better job of controlling costs, negotiating managed care contracts, scheduling cases, and coding and billing.

"We treat your practice like a business," says Mr. Mallon. "With all the pressures on physicians today from family, reimbursement levels and patients, you have to operate more efficiently."

Dividends vs. liquidity
Many ASC owners overestimate the value of wholly owning their ASC and receiving an annual income versus selling a portion of their potentially illiquid investment to a corporate partner, says Randall E. Cole, MD, a cataract and refractive surgeon from Rogers-Bentonville, Ark.

Dr. Cole and Bill Hof, MD, developed the two-OR Boozman-Hof Eye Surgery and Laser Center in April 1996. In January 2003, AmSurg bought a 51 percent share in the ASC for about $1.5 million. The center was valued around $3 million based on a six multiple on earnings of $500,000 a year.

The catalyst for "pulling some of the sweat equity out," was an inability to bring associate doctors into the partnership. "They didn't want to pay much, if anything, for ownership," he says. "I knew then that it was time to call a partner in to realize some equity and get an affordable buy-in price for docs."

When doctors are developing their surgical centers and later watching it spit out a lot of cash, an exit strategy often is the furthest thing from their minds, says Mr. Vick. "So you end up down the road with doctors of all different ages - from 35 to 70 - with no good, clean way for senior docs to get out and no good way to bring in younger docs at a price that makes sense," he says. Most corporate partners will insist on offering ownership to other surgeons, but how many young surgeons who want to buy a 10 percent interest in a center valued at $12 million can swing the $1.2 million buy-in price?

Dr. Cole was able to extend favorable terms to a third ophthalmologist - a one multiple to buy in - who now owns 20 percent of 49 percent of the center. Dr. Cole and his partner each own 40 percent of the 49 percent. Dr. Cole hopes to add a retinal surgeon.

"In the long term, we're getting a structure that lets us bring other doctors into the center without having to give away ownership," says Dr. Cole.

Dr. Cole has access to benchmarking data from the 40 or so ophthalmic ASCs AmSurg owns. Monthly operating reports detail key operating expenses such as total employee hours per procedure, clinical hours per procedure and IOL costs per procedure.

He also has a mediator to intervene in inter-physician dynamics, such as when a doctor wants to do a procedure that's outside of the policy and procedure manual.

"A corporate partner has helped create a more stable, mature business environment," says Dr. Cole. "Physicians tend to be impulsive and self-centered, looking out for their interests."

One small drawback: His facility manager has to compile a lot more data and prepare a lot more reports for corporate.

Selecting the right partner
Experts say there are two must-haves when selecting a partner:

• A history of growth. A corporate partner's primary responsibility is to ensure the center's success, both economic and operational. "You'd rather own 51 percent of a winner than 100 percent of a marginal project," says Mr. Lee. Some companies have a much better track record in producing profits than others. While they all charge roughly the same management fee - 5 percent to 7 percent of net collected revenues - some routinely produce profits of 40 percent or more of revenues at the center level, while other companies produce profits of only 20 percent to 30 percent.
• Integrity. The difference between good and bad companies that provide management services to surgery centers is substantial. Many management companies have little experience, and the experience they do have is not often good. The best protection in any transaction is to be in business with good people with high integrity. "If you're stuck looking to your operating agreement for help, you most likely have already found yourself in an extremely costly exercise," says healthcare lawyer Scott Becker, Esq., CPA. Adds Scott Thomas, a co-owner of Pinnacle III: "Select a player you can live with, who philosophically is on the same level as you."

And finally, realize that there's no cookbook answer to building a successful surgery center.

"Physicians have this idea that corporate partners are miracle workers, that - abracadabra - we have the secret solution. We're not, but we can be solid partners," says Bill Kennedy, vice president of business development for NovaMed. "We're your arms and legs that can take some of the management responsibility off of your shoulders and some of the risk off of the table."