There can be significant benefits to having a hospital as a partner for a surgery center, as long as the terms of the partnership are beneficial for the surgery center. If the partnership is not beneficial a center may find that it has sold equity to a non-producing partner and this can prevent the physician-owners from achieving their long term goals.
It is advisable to have a plan on how the hospital will be brought in as a partner and specific expectations and goals in mind prior to initiating discussions with the hospital. Here are some thoughts on how to successfully bring in a hospital as a partner:
First of all when seeking a strategic partner it is usually politically important to include one or more hospitals in the negotiation. From a business perspective it can be very beneficial for an ASC to have a hospital partner if they will give you access to their contracts and if they will refer patients to your center. These are big “ifs” and need to be clearly negotiated as part of the deal, before the deal is signed. Usually only one hospital is included as a partner.
Secondly the hospital’s usual starting position is that they need to own 51% and they use the income method of valuation so they almost always give the center a lower value than the ASC management companies that use the market multiple of EBITDA method to value a center.
Thirdly, if the hospital ends up as a 51% owner, regardless of what they say, they will want to run the center like a hospital thus destroying the efficiencies and economies that have made your center successful in the first place.
So based on our experience our recommendation is to:
1. Include the hospitals in the negotiation so they feel they are part of the process
2. Seek partnership proposals from several ASC management companies that have models that include a hospital partner and that have a track record of negotiating successful 3-way deals with a hospital as a minority partner
3. Obtain partnership proposals from more than one ASC management company as they will offer more than the hospital so this establishes FMV for the center and creates competition to maximize the value
4. If it makes sense to have a hospital partner a 3-way deal can result in the best of all worlds: access to hospital contracts and referrals, a management company that knows how to profitably manage ASCs, the highest possible price, and a corporate partner that is oriented to maximize profits so that distributions will continue to increase.
5. Negotiate a deal first with the selected ASC management company, and then with your management company’s assistance and expertise negotiate bringing the hospital in as a partner if it provides specific benefits to the partnership.
Jonathan C. Vick, the founder and President of ASCs Inc., has advised on development, merger, strategic acquisition and real estate sales transactions for over 500 physician-owned ambulatory surgery (ASCs), endoscopy centers (ECs) and surgical hospitals since 1984. He has extensive experience in ASC and EC sales, development, business planning, operations, valuations, and strategic mergers & acquisitions. He can be reached at 760-751-0250 or at e-mail: [email protected]. More information can be obtained at website: www.ascs-inc.com
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