What is stage one and two surgery center due diligence?

The phrase due diligence is actually a misnomer. It was originally used in connection with public underwriting. The principal liability section of the Securities Act section 11 establishes a defense in securities lawsuits for misleading prospectuses for certain persons, like underwrites, if they exercise due diligence in investigating the company before selling its securities. The term is now more broadly used to mean the investigation that an investor or a buyer undertakes of a prospective seller. The due diligence process is extremely important as it affects the buyer’s decision whether to invest or acquire the company, what terms and for what prices. Additionally, this allows you to get a very deep and wide understanding of your business because you must be able to present your business in the most favorable light. The goals of the prepare to sell my ASC stage is to prepare your surgery center so it looks as appealing as possible to a potential buyer. Additionally, the speed of the process, the efficiency of the process and overall buyer perception are three big components that you want to manage. Here is how we get a handle on that. Being organized and proactive vs reactive helps those three things happen. This also allows you to get in front of any potential weaknesses that you might have or see and allow you to craft the message around the options you see around how these could be strengthened. Stage one and stage two data are essentially the paperwork stages and can be exchanged remotely and easily.  We use a virtual data room with folders and give different levels of access. Some of the buyers will argue that doing due diligence is a costly process for them and want some sort of no shop or standstill agreement in place. This is not real in our experience and we are against standstill agreements in most situations without a break-up fee, but that is another topic for another day. Proactively providing the paperwork will help rebut the notion that this process is expensive for the buyers. As we have stated there are two stages here, sometime depending on the size and scope of the business we are selling and the buyers we will actually combine the stage one and two but with them broken out you can wait to give more information as you get more comfortable with knowing that the potential buyer is a real buyer. Stage one Physician Information: Curriculum vitae with D.O.B. Corporate Entity Structure: List of all shareholders. Percentage ownership by type of security. Description of corporate parent and subsidiary ownership structure. (This information will help us prepare an ownership and corporate structure chart that will enable us to...

What are some of the regulatory risks associated with physician recruitment and syndications?

Note that we aren’t lawyers, thus you need to work with your lawyer on this. This is from the perspective of an SEC registered and FINRA Licensed Investment Banker as well as a Securities Principle responsible for the supervision of Investment Bankers and their activities. You need to be aware that syndication involves the sale of securities-whether you are selling shares, or LLC Units or limited partnership units. Federal and state securities laws determine the manner in which the offering and sale of ownership interest must be conducted. Additionally securities laws control who can affect the sale of securities and how. There is a white paper and a few articles around this very important but not well understood law that are posted on the Ambulatory Alliances website. To ensure compliance with the securities laws, syndication almost always involve some form of disclosure documents, whether an offering memorandum, purchase agreement or similar instrument. The primary purpose of such a document is to fulfill the disclosure requirements of the Securities Act, while serving as a shield against any future charges of violating the antifraud provision of the securities laws. The documents will serve as an outline of the transaction and a tool for marketing the offering. The gist of the documents is to ensure you have an educated buyer, educated in the sense that they know what they are getting into. With secondary offerings, even though one physician is selling some of their shares to another physician you need to make sure that the second physician is fully informed by giving them copies of all of the original documents and updated documents such as current ownership percentages, updated financials including any debt instruments, updated disclosure documents etc. Additionally, we have seen some doctors trade these securities often. The securities laws as well as all of the transaction documents mimic the laws and state something along the lines of- you acknowledge that the purchase of the securities is for the investment intent and not for resale. The securities must come to rest in the hands of the investor. Different states have different interpretations or safe harbors so to speak as to how long a physician must own the security before they can resell it. That is why when we do a resyndication, before executing an exit strategy we make sure the securities have come to rest and we are very careful. In some cases around the above we have advised clients in certain situations that warrant it that they can write the state securities administrators and ask for a “no action letter”, which is a letter to the state securities administrator or SEC for that matter explaining the action asking if the staff...

What are some typical deal killers and how should an ASC address them early on?

Here are some things that kill deals: Time – taking too long (addressed by being very prepared when selling your surgery center) Not knowing what you want (unable to make a decision) Unrealistic expectations Not knowing the market Arguing over positions rather than working to find a way to get the deal done Not having your physician partners bought in Not having open communication (kills the trust factor) Not disclosing potential snags early on or trying to hide issues – buyers will find out all the problems during the due diligence process and then the seed of doubt could creep in Coming to an agreement on deals terms then wanting to change them later For example, one client seller got information from their lawyer that the prevailing multiple for surgery centers was 5-7 times. The problem was that the lawyer understood that it was 5-7 times of EBITDA for 50% of the company. Think about that: 5-7 x of 100% of EBITDA for 50%, which in reality would have made it 10-14 times EBITDA. We had an early LOI come in that we thought would be solid with some negotiating, but because it was not 10-14x, the main selling doc dismissed it as a bad offer and did not want to discuss it. We spent the next 4 months collecting other offers and speaking with other buyers just to allow the market to educate the client. Luckily we knew that the first LOI was solid and continued to engage the buyer to keep them engaged and wanting the deal because we ended up selling to that buyer. Know the market because not knowing kills...

What does an ASC need to do to syndicate to new physicians?

The preparation all depends on what stage of the life cycle that the surgery center is in and if it is a primary or secondary offering, but a good bit of the process is the same, so here is what you need to do to syndicate to new physicians. You need to be aware that syndication involves the sale of securities-whether you are selling shares, or LLC Units or limited partnership units. Federal and state securities laws determine the manner in which the offering and sale of ownership interest must be conducted. Additionally securities laws control who can affect the sale of securities and how. To ensure compliance with the securities laws, syndication almost always involve some form of disclosure documents, whether an offering memorandum, purchase agreement or similar instrument. The primary purpose of such a document is to fulfill the disclosure requirements of the Securities Act, while serving as a shield against any future charges of violating the anti-fraud provision of the securities laws. The documents will serve as an outline of the transaction and a tool for marketing the offering. The gist of the documents is to ensure you have an educated buyer, educated in the sense that they know what they are getting into. If this is a primary offering you will need to get the offering documents prepared. A primary offering is when the surgery center sells an equity position and receives the payment for the equity position. If this is secondary offering-a secondary offering is when a current share holder sells their units and gets the money, you want to collect copies of the original offering documents, current financials, any contracts, debt etc. Because we give copies of all of the original documents that the current owner was given with update financial, case load, etc to the new physicians prior to them investing. We need to make sure they have all the information disclosed. When in doubt disclose it in writing. Review your governing documents. You need to understand what the document state. You might need to update them for various reason and this is a good time to do it. For example if you are one of the founding members of an existing ASC or the rain maker you may want to consider carving out your ownership from some restrictions that you would apply to new owners. You can create different classes of shares such as the founding owner’s class shares. Depending on the circumstances, a carve-out from certain restrictions may be appropriate since you took the risk on the initial investment and developing the ASC. Additionally one of the surgery centers that I am working with historically has not had a non-compete....

How should an ASC handle underperforming surgeons?

Underperforming physicians are a problem in most centers. Once upon a time, a surgery center had 20 to 30 partners, but only a few were truly committed to the ASC and used it exclusively for their cases. Times have changed and those committed physicians are increasingly getting upset with the underperforming physicians and those underperforming physicians reduce the value of the surgery center in the eyes of the buyers. Even though we are discussing this in the context of preparing your surgery center for sale, we believe that you need to 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, which puts your center in the best light for an acquisition. Fairness and group persuasion might be the best and easiest ways to convince partners to sell some or all of their shares. Have someone, or a group of someones, approach the offending physicians and ask them to sell their shares. There are two ways to redeem the outgoing physician’s shares. An existing physician or physicians can purchase  them. 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. Most ASC documents have agreements in them whereas all partners must fulfill the one-third test, which means that for a physician owner, one-third of his income derived from performing outpatient surgery  must be performed at the surgery center in which he has an ownership stake. The ASC safe harbors. If the physicians are not adhering to that, the typical agreement allows for removal for non-compliance by some method. Additionally many ASC documents have the “no cause” termination or defaulting partnership provision within them, enabling a vote be it the board or a supermajority of owners (usually 65 percent to 80 percent) to remove an owner for any or no reason or because of a defaulting event. If your operating agreement doesn’t contain any of these and you are looking at this in the preparing to sale context, you should be able to squeeze them out by their paying FMV for their shares and not being allowed to be part of the new company that you would create with the buyers and with the docs that are committed to the surgery center. Remember, this is general information and you need to be working with your lawyer to execute...