Syndication for Surgery Center

[s2kmw]

I am being recruited for a syndication for a new surgery center. It would be 50/50 split of ownership between hospital/surgcenter development and physicians. So far about 20 physicians have been recruited (spine, ortho, cardio, optho, gen surg, ent, and pain). There is already another surgery center nearby but that is all physician owned. The area is developing quickly and there is a battle between hospital systems to establish health centers in that area. Slated opening date is ~7/2021. Physicians are being offered 1-4% stake with the caveat that they provide a guarantee of 125% of their share of debt which is estimated to be about $10,000,000. So it would be about $125,000 per 1% stake. Shares would be valued as 6-7 times EBITDA. Pro-forma is based on the physician self-reported cases from the previous 1-2 years.

I do have have enough saved to buy the shares and it would not be a significant part of portfolio. Part of me thinks this is a great opportunity to get in from the beginning. The other part is hesitant b/c of the guarantee of the debt and with the whole COVID thing now it's unpredictable. Does having a hospital system as a partner provide more security? The hospital has done their research and would not venture forward with something like this unless they think it's going to work. The development co. seems to think the hospital will not let this fail. Thoughts?

[Zaphod]

A lot of unknowns here as with anything.

However, do not put any hopes on the hospital having done any strategic diligence at all. This could simply be a way to get an in or slow down competitive forces with zero interest in it making money itself, as long as it keeps/crowds out competition its worth it in the end. Hospital systems do this all the time, buy stuff at premiums and just shutter practices, etc...to keep competition out.

[Tim]

“I am being recruited for a syndication for a new surgery center. It would be 50/50 split of ownership between hospital/surgcenter development and physicians”

Rarely would the split be 50/50. Likely 51/49. For profit hospital systems (HCA) use this model for expanding their footprint. It is to expand their market share competing against the regional two nonprofit healthcare systems. Three way dogfight for the money making “elective” healthcare.
That said, the control remains with the hospital rather than physicians. It does align interest and can be successful. That controlling interest can be sold to another hospital system as well.
Either way, the hospital system for a surgery center needs to make money. It can be a great source of additional income if it reaches critical mass. No opinion on the pro-forma.
The competition “all physician owned” I take it you don’t have an ownership interest in. What is your income supplement alternative?
• Success of the surgery center
• Your ability to get income from operating there.
You would need a valuation firm to figure out if the numbers make sense.

[ENT Doc]

6x EBITDA sounds very high. Physicians don’t seem like the winners here.

[childay]

The hospital has done their research and would not venture forward with something like this unless they think it's going to work. The development co. seems to think the hospital will not let this fail. Thoughts?

You trust the hospital to not consistently make bad decisions? And consultants to be honest? Must be new... no offense. Proceed cautiously.

[HandFellow]

we did something with surgcenter over the past few years. 1 share cost 8k, there are a total of 96 shares. we are all signed on the debt. not sure about this 125k thing. probably because you are working with a hospital system. sounds suspicious. I would not want to work with the hospitals, that's kind of the point of owning a surgery center, isn't it?

[Eye3md]

we did something with surgcenter over the past few years. 1 share cost 8k, there are a total of 96 shares. we are all signed on the debt. not sure about this 125k thing. probably because you are working with a hospital system. sounds suspicious. I would not want to work with the hospitals, that's kind of the point of owning a surgery center, isn't it?

I agree. Within my group, we are part owners with two surgery centers. I've never had to sign a loan document where I guaranteed 125% of my personal share. I'd want a lot more info before jumping in on this "deal"

[childay]

In case my reply was a bit too glib, it's not like we're talking about a currently running center here where presumably you can look at real numbers. You need to closely scrutinize that pro-forma which may be totally inaccurate. I am not invested in such a center but have heard of the projections being wildly exaggerated, including cases that would not be at all appropriate for being done outside hospital etc. Also the 125% sounds odd yeah. How much is hospital required to finance if the center loses money? Why is it 50/50? Who is the tiebreaker in decisions?

[ACN]

Seems expensive for a brand new surgery center. Also, who controls the board and voting rights? Either you get majority shares or majority voting rights

[Tim]

“Pro-forma is based on the physician self-reported cases from the previous 1-2 years.”

The basis does not mean the results are accurate or even close to realistic. Simply a projection. Don’t take it at face value.

[childay]

“Pro-forma is based on the physician self-reported cases from the previous 1-2 years.”

The basis does not mean the results are accurate or even close to realistic. Simply a projection. Don’t take it at face value.

Yes exactly