The physician joint venture model is popular in a variety of healthcare services including ambulatory surgery centers, cardiac cath labs, dialysis and radiation oncology. Physician joint ventures offer two key benefits to growing companies: (1) a ready source of capital to fuel expansion and (2) the investment by physicians creates a strong bond with the company and engagement with the company going forward. Buyers are attracted to these segments for their cash flow but are sometimes deterred by the idea of having minority or even majority joint venture partners at each operating facility. There have been several recent announced and closed transactions involving physician joint ventures including the acquistion of National Specialty Hospitals by Irving Place Capital and the acquisition of NovaMed by an affiliate of HIG.
The following are several considerations that should be made by the buyer (and considered in advance by any seller) for a joint venture structured management company:
1. Joint Venture Physician Approvals. A close examination of the joint venture operating agreements or governing documents will be required to determine if the transaction will need approval by physician joint venture partners. If approval is needed, the parties will need to examine an approach to obtain such approval.
2. Physician Joint Venture Tag-Along Rights. Physician joint venture partners may have tag-along rights to participate in an acquisition transaction. The buyer should examine whether the tag-along rights enable the physician joint venture partners to sell all of their shares or just a portion. This also may raise consideration allocation issues among the various operating entities.
3. Lending Issues. In the joint venture context a lender may not have the ability to take a security interest in all of the assets of each joint venture entity. Furthermore, there may be a restriction on the management company pledging its equity interest in the joint ventures to a lender. The buyer should review closely these issues to ensure that sufficient collateral will be available to support a cash flow loan.
4. Management Agreements. Joint venture structures commonly also include a management agreement with each facility that creates a stream of cash flow for the management company. These agreements should be reviewed to confirm that a transaction will not disrupt that cash flow and that assignability can be achieved in the context of a transaction.
These issues are just several of the important items that should be addressed early by an acquirer of a joint venture structured health services company. These items should also be considered by any seller well in advance of a transaction to facilitate the presentation of a smooth transaction to the buyer.