3 Ways an FMV Can Save Your Joint Venture

Written by Greg Anderson | August 27, 2015

Among the models found in the healthcare market, joint ventures (JVs) can benefit organizations that have an interest in pursuing a service together. Examples of services operated in JVs include the following:

Advanced imaging
Equipment leasing
Surgical facilities
Treatment centers (e.g., cardiac catheterization, dialysis, endoscopy, infusion, radiation oncology, vascular)
Laboratory
Management services
Real estate
Rehabilitation
Urgent care

Parties to JVs aren’t limited to hospitals and physicians. Management companies are among those who also enter into JVs. A wide range of opportunities exist to share in the profits, equity, and control of a JV business enterprise, usually without combining entire organizations. JVs can be started with working capital, tangible and intangible assets, and equity contributions, while flexibility in the choice of venture and entity adds to their attractiveness.

An organization may choose to expand its market share or name recognition by entry into new markets. A party may also decide on a JV to capitalize on the expertise of another or gain economies of scale. One party may enter into a JV with another to reduce competition, gain access to intellectual capital, spread financial risk, improve reimbursement, or access working capital.

But these models aren’t without risk. Entering into a JV often results in some degree of relinquished control over the business. Operating a healthcare business with another provider requires sufficient due diligence to ensure that the quality of care will be as good or better than before. The additional regulatory burden, especially when a referral relationship exists, requires a careful approach to compliance. Compliance with the antitrust laws, the federal anti-kickback statute, the Stark law, federal and state tax-exempt laws, state certificate of need rules, and privacy laws are among the list of federal and state laws and regulations worth noting. As always, we recommend parties contemplating a JV seek the advice of knowledgeable healthcare legal counsel.

As the parties form the JV and the regulatory landscape comes into focus, the question of fair market value (FMV) arises. While questions of FMV related to the value of the JV, the FMV of each party’s holdings in the JV, and the FMV of management services provided in a management services arrangement are among the questions we hear, one of the most challenging questions addresses the value of contributions that each JV participant brings to the venture. This question can’t be overlooked because of the potential compliance implications, but to answer it presents some real tests:

Deciphering what is being contributed by each party is critical, but often clear as mud (and good due diligence is no less important). Both parties may think they are each contributing an ancillary service line to a JV, when in reality Party A is contributing its name brand, physical location, long-term leases, CON, and equipment, and Party B is contributing working capital, clinical and administrative staff, and operational expertise. Finding the right answers here gets to the real value of each party’s value in the venture and certainly helps with the next two tests.
Getting to the FMV of the contributions on the front end is key, but can be controversial. Not only is it important to recognize the correct value of a contributed asset (and liability); it is equally important to address misconceptions about asset values (perhaps in the case of a physician workforce, certain synergies, lofty cash flow projections, etc.). Of course, stick to the applicable regulatory definitions of FMV to avoid compliance risks.
The JV parties’ contributions are sometimes disparate and sometimes almost mirror each other. As much as two parties to a JV may want a 50/50, 51/49, or other ownership arrangement, the asset values aren’t always spot on. Reaching the FMV conclusion early to allow time to address working capital contributions or alternative structural issues can avoid problems when the analysis just doesn’t fit the transaction.

Of course, valuing the assets contributed by the parties to the venture requires experience with these business arrangements. Likewise, assessing the FMV of management services provided to a JV can best be accomplished by analysts who understand this environment and see management arrangements on a regular basis. Stepping off into these waters without experienced legal and financial help is a risk that far outweighs the investment.

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