Edward Hetrick, president and CEO of Facility Development and Management in Orangeburg, N.Y., outlines three points when an ambulatory surgery center may have to undergo syndication. Syndication involves bringing together physician-partners to create a new business or to reform the existing business, which is also called resyndication.
1. When the center is founded. This is the original syndication with the original group of owners. "The effort focuses on having a very strong group of surgeons with sufficient volume," Mr. Hetrick says. A great deal of time is spent creating organizational documents and operating agreements with non-compete clauses, definitions of buy-outs and management structure, and establishing methods for bringing in new members.
If the center adds new partners, the ASC does not necessarily have to be resyndicated. The shares of existing partners can be diluted proportionately without having to change the ownership structure. For example, even if the number of partners is doubled, the share for each existing partner is simply diluted by 50 percent.
2. When physician-partners are leaving. An ASC may have to resyndicate when ownership is ceded by several retiring or non-producing surgeons. The remaining surgeons create a new legal entity for the surgery center, which then buys out the old entity. This will require drafting new documents, and the sale has to be based on fair market value.
Resyndication can be used in either a friendly or unfriendly manner. In a friendly resyndication, the exiting physicians readily agree to be bought out and go on their way. "This can be done relatively simply," Mr. Hetrick says. Since ASC operations are already in place and basically only have to be handed over to a new set of owners, the change is much easier than the original resyndication.
An unfriendly resyndication is more challenging. In this situation, non-producing partners have to be told they need to hand in their shares. This change is often prompted by several high-producing partners. They may be threatening to leave the center or not perform as many procedures there unless the non-producers go. "Even though ASC ownership cannot be based on productivity, the partners recognize a basic level of fairness," Mr. Hetrick says. "There is an assumption that each of them will produce revenue." The governing board will have to produce a majority vote imposing a resyndication plan on the center and it will need good legal representation.
3. To improve performance. In this scenario, physician-partners in two underperforming centers want to merge so they can get into the black or make themselves attractive to a corporate buyer, such as a management company or a hospital. Resyndication of two separate centers is fraught with challenges. "There are significant issues when two sets of physicians merge," Mr. Hetrick says. "After all, they have been competing centers. In many cases, these physicians founded two separate centers because they couldn't get along."
Both camps will have to overlook old conflicts and forge a strong, trusting relationship that can withstand potentially explosive disputes, not the least of which will be deciding which center will have to be closed. "Each group of physicians put their blood, sweat and tears into their center and feels an allegiance to it," Mr. Hetrick says. However, if the physicians can be pragmatic, they usually are able to coalesce around one center. Factors in such decisions include accessibility to patients and physicians, the facility's condition and its size.
In this situation, partners' disputes can be mediated by a broker, whose main duties are to produce a projected merge financial statement and negotiate with a corporate partner, if it is part of the deal. "The broker has to make sure that all of the physician-owners keep their eye on the money they will be getting and don't get caught up in disputes," Mr. Hetrick says. A good broker can educate the physician-owners on the long-term advantage of the merger and how everyone is going to benefit. "He can talk about the obvious efficiencies, such as having only one administrator and only one business office," he says.
If a management company is part of the deal, the physicians will receive a significant sum of money. The management company typically asks for 30-50 percent of the center, and payment will be based on the prospective financial condition of the merged centers. "The ongoing distribution will be based on a larger sum than what the centers had been earning," Mr. Hetrick says. That's because the whole is worth more than the sum of its parts. "The merged entity will be more profitable and the corporate partner will have paid off the debts," he says. The merger and the buyout could be accomplished in two separate steps or in one single step.
Participants will need to lawyer up, Mr. Hetrick says. Each center will have an attorney and the new entity will have a separate attorney. And if the buy-out by the management company is simultaneous, a fourth attorney representing the management company will be part of the deal.
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