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Inside the ASC Deal Process: From LOI to Close
0 Playsin 11 hours
Stephanie Tarry brings more than three decades of experience in the ASC industry. Now with Physician Transaction Advisors, she works closely with physician groups to evaluate partnership opportunities and guide them through the transaction process from start to finish. In this episode, she breaks down how ASC transactions actually unfold, from early readiness and confidential information memorandums to letters of intent, quality of earnings, and closing.
In our data segment, we’re breaking down Case Share by Age Group from HST’s demographic benchmarking report. If you’re not tracking your age mix, you may be missing a key component of what is truly driving demand and financial performance at your ASC. There is a direct correlation between age and specialty, which means there is a secondary correlation between your patient’s age and potential revenue.
Resources Mentioned: https://www.hstpathways.com/specialty-data/asc-demographic-data
Brought to you by HST Pathways.
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Transcript
Introduction to the Podcast
00:00:00
Speaker
Welcome to this week in surgery centers. If you're in the ASC industry, then you're in the right place. Every week, we'll start the episode off by sharing an interesting conversation we had with our featured guest, and then we'll close the episode by recapping the latest news impacting surgery centers.
00:00:16
Speaker
We're excited to share with you what we have. So let's get started and see what the industry's been up to.
Stephanie Terry's Background and Role
00:00:24
Speaker
hey everyone. Here's what you can expect on today's episode. Stephanie Terry brings more than three decades of experience in the ASC industry, which spans development, operations, and equity ownership.
00:00:37
Speaker
Now she works for physician transaction advisors, and she works closely with physician groups to evaluate partnership opportunities and guide them through a transaction process.
00:00:51
Speaker
In today's episode, she breaks down how ASC transactions really unfold. from early readiness to the confidential information memorandum, SIM, to letters of intent, quality of earnings, closing, et cetera.
00:01:07
Speaker
And she also shares how to evaluate competing offers and choosing the right partner that would really be a good fit long-term.
Impact of Age Demographics on ASC Operations
00:01:18
Speaker
After, in the data segment, we're breaking down share by age group from HST's Demographic Benchmarking Report.
00:01:27
Speaker
If you're not tracking your age mix, you may be missing a key component of what's really driving demand and financial performance at your ASC.
00:01:38
Speaker
There's a direct correlation between age and specialty, which means there's a secondary correlation between your patient's age and potential revenue. Hope everyone enjoys the episode and here's what's going on this week in Surter Centers.
ASC Transaction Process Overview
00:02:03
Speaker
Stephanie, it's great to have you on today. Can you give a brief overview about yourself for our listeners? I certainly can. Thanks, Grant. Thanks for having me. Stephanie Terry with Physician Transaction Advisors. I've been in the healthcare industry, which will certainly age me for probably 35 years, and primarily in the ambulatory surgery center space of development management and equity ownership in in surgery centers with a fairly large corporate company specializing in in ASC management.
00:02:39
Speaker
My semi-retired in 2020, and upon that, I came back and joined up with Jim Frond with Physician Transaction Advisors. And we are focused primarily on helping physicians monetize on the success that they've had with their surgery centers, their practice and or imaging centers.
00:03:00
Speaker
And it certainly is a shift from helping them develop and going through that process, but certainly gives me a very good understanding of the entire operational process. I spent some time as an an interim CEO o for a hospital. So gave me a lot of insight to the operational side, even the clinical, although my clinic I'm not a clinical background, finance and accounting.
00:03:25
Speaker
is my background by degree. So. Thanks for that overview. So we're going to chat about transactions and acquisitions. And before we dive in there, can you walk us through what the overall transaction process looks like at a high level for folks?
00:03:46
Speaker
Certainly can. Typically grant, we We certainly, we get a phone call or these are relationships we've had for a long time with physician groups and they approach us and basically sharing their they're thinking about or want to explore the opportunity to seek a corporate partner. Numerous times it's for various different reasons. Maybe it is they do want to have some help on the management side. Maybe it is that they do feel like they're at their peak and it's a good time to monetize on their operations.
00:04:20
Speaker
But from there, we evaluate the business. That's part of what physician transaction advisors will do is help them evaluate their business, where they are today. That's primarily looking at the financials at a high level.
00:04:33
Speaker
From there, we proceed into gathering due diligence information and preparing what is a very important piece of this, our confidential information memorandum, which allows us to take this to market to the qualified eligible buyers for these particular centers or practices.
00:04:52
Speaker
The SEM, of course, in encompasses many things, of course, financials. But again, this gives us an opportunity to share a lot more. The backgrounds on the physicians, the staffing, the demographics, the market that they're in and ah an opportunity to share growth opportunities for the center.
00:05:14
Speaker
All of that is combined in this confidential information memorandum.
Creating and Using SIMs in Transactions
00:05:20
Speaker
It is a moving target because six months later, the financials look different. So we're always refreshing, as you can imagine.
00:05:27
Speaker
The data room allows all of the potential eligible buyers to definitely dig into the financial information, statistical data, more of that side of the review of revenue cycle management, et cetera.
00:05:42
Speaker
Great. And when you first get connected to a center and you look under the hood, what are some of the readiness gaps that you find before they should go to market for a transaction?
00:05:55
Speaker
Yeah, from a high level, many times we'll find a successful surgery center that is a majority owned by one physician primarily.
00:06:06
Speaker
Many times we'll need to make a suggestion just from that first glance of bringing in some additional physician partners, because most of our buyers like to see physicians that have an equity stake in the surgery center to know that that that volume is going to maintain after a potential transaction. So that's one thing that we'll take a look at. Where are they in their growth patterns? Are they looking to recruit physicians? Are they in process of bringing on new partners? Many times we'll advise, let's get the new partners on board first. Or maybe it is the look that we need new partners. We're not at critical mass to go to market.
00:06:49
Speaker
We also want to take a ah good look at their revenue cycle management and how they're handling that, the process they use, and just a thorough review of their financials to help position them better if we can do so before we go to market.
00:07:05
Speaker
And therefore we do advise many times that let's wait a year or or longer if they're in the process of recruiting docs or expansion. That's another reason why we'll maybe ask them to pause until they complete their expansion.
00:07:21
Speaker
Yeah, that makes a lot of sense. you You mentioned earlier the confidential information memorandum or SIM. Or, you know, sometimes goes by other names like the marketing packet as well. Can you share with listeners what that is and what should be included in it to help attract serious buyers?
00:07:44
Speaker
Certainly can. So the confidential information memorandum certainly shares a couple of things. and The process and timeline that we're going to follow, that's typically in there as we go to market.
00:07:55
Speaker
But also we want to start by describing the practice or the surgery center to the best of our ability, from size and and and space to a number of ORs, procedure rooms, number of physicians.
00:08:11
Speaker
This is our opportunity. it's it's a It's our playbook. it It describes the ownership makeup, the physicians and their certain specialties. If it's an orthopedic group, we have joint surgeons, spine surgeons. We want to make sure our prospective buyers know the pool of physicians that are partners.
00:08:31
Speaker
We also look at the market demographics. Are they in a growth market? And if not, what makes the market unique and ah a good opportunity for a buyer? And then we also, in in that packet, include the staffing of of the facility.
00:08:48
Speaker
We take a look at their case volume data over a period of time, the financials over a period of time. it It really does encompass a lot about the facility or the practice.
00:09:01
Speaker
But from there, i think this is the one thing i do have to share. it helps our prospective buyers formulate their questions. It certainly isn't providing everything. And if if nothing else, it helps spur those appropriate questions they need to ask about the surgery center.
00:09:23
Speaker
Right. And so... You're distributing the SIM to potential buyers. Can you talk through the next stages such as IOIs, management meetings, LOIs and such?
Evaluating Offers Beyond Pricing
00:09:38
Speaker
Right. as i mentioned in the confidential information memorandum, the SIM, we do have a process timeline that's associated with that. And if a potential buyer is engaged, they are aware of this timeframe, which is very important, I think, to help have a formal process that within 45 days, we expect to have the initial letter of intents for the physicians to review. We want to schedule meetings with a potential buyer and the partners of the surgery center or practice.
00:10:13
Speaker
So those are key elements. And at 45 days, we typically going to expect to see those letter of intents come in from those that are serious buyers for the facilities or serious partners.
00:10:26
Speaker
Once those letter of intents come in, it is our opportunity sit down in front of the physician partners and share with them each and every one of the letter of intents. They're going to be unique in their own way. They differ.
00:10:42
Speaker
i think we'll always say physicians go to market with an assumption of what they want, how they their goal But sometimes that goal changes as they start to see the different letter of intent presented with the different terms and structures.
00:10:58
Speaker
And what we're really hoping to do through even the initial letter of intent is marry up the physicians with the right partner culture, same strategic goals, et cetera.
00:11:11
Speaker
so So we get through you know that process of now we're going to select if we choose. However, approach we approaches as a risk-free transaction for the physicians.
00:11:24
Speaker
If none of these letter of intents meet with what the physicians were seeking, you know we certainly don't encourage them to move forward. so But in this process, if we choose to move forward with one of the letter of intents, that's usually based on the the price and some of the main terms and structure of the deal.
00:11:48
Speaker
In a letter of intent, I think it's important to know that it is a non-binding document outside of confidentiality and the other part being exclusivity. Most of the buyers are going to want you to not continue to go out to market over a period of 90 days, 120 days while they complete their formal due diligence of the surgery center.
00:12:13
Speaker
So I think that's key. that There's always subject to renegotiation of those, we don't want to see that because that we go into this in good faith that these will be our terms.
00:12:24
Speaker
and And from there, we do start the process of due diligence, take some time, legal documents, and usually we can expect that to be another three months after signing the letter of from intent, three to four. That's great overview.
Understanding Common LOI Terms
00:12:40
Speaker
In the LOI, you talked about how there can be different terms and structures depending on who the buyer is and what they've put forward. you talk about what common terms and structures are and how they differ from each other?
00:12:58
Speaker
Certainly can. i think one of the key elements in the terms and structure, as I mentioned, is of course price. But also we typically will see that these groups want to come forth with the management of the facility, something the partners are most likely looking for. is that management expertise. So we will evaluate the the management component and the fees associated with that.
00:13:23
Speaker
I think from our experience of a number of transactions, we're pretty positioned to share with the doctors what we feel is fair market value and assist in negotiating that if we need to. The other is the non-competes or the tails that will come with a transaction. Many of these buyers are paying large dollars to be a partner in these surgery centers. And therefore, you know, that non-compete to ensure that these physicians we are going to maintain as a committed partner is very important. So there's always going to be non-competes in the tail, but we also want those to be reasonable. and So that's a key component of of the term sheet.
00:14:04
Speaker
We also, as I mentioned, we'll see that the terms associated with the management agreement, billing and collection agreements, you know are those five years? Are they evergreen? All of those are key components to the future or post-transaction of partnering with one of these groups. Truly understanding it it ends up most likely being a marriage and many times a marriage without the opportunity for divorce. And they need to to understand that going into it. Yeah.
00:14:37
Speaker
Yeah, and let's assume that ASC is getting multiple LOIs.
Assessing Multiple LOIs for Success
00:14:44
Speaker
How do they evaluate these different buyers?
00:14:49
Speaker
And before we were recording, you shared about how, hey, we don't always suggest just choosing the premium priced bidder. There are maybe some circumstances where you want to optimized for other parts of the the terms and structure.
00:15:09
Speaker
So can you share about how you suggest they evaluate these offers? Absolutely. and And you're correct. we We certainly don't want it to be primarily focused on price.
00:15:22
Speaker
However, as you can imagine, as a letter of intent comes forward and we're doing a comparison, that's usually your your your first glance is what is someone willing to pay? and then you work through all those other terms. But, you know, as I mentioned, the length and the percentage that's being placed on the management fee or billing and collections can make a ah big difference in the future of the surgery center.
00:15:49
Speaker
The other thing is so often from a revenue cycle management or top line revenue, the other is maybe we're seeking to help improve The contracts, the payer contracts, many of our independent surgery centers or practices do not share in the same contracts that you might see with a joint venture, with a large corporation or with a health system. So that's another thing that we're evaluating is post-transaction.
00:16:17
Speaker
What will this pro forma look like going forward in five years? A big, big part of their decision making, because it's not about just the money up front, but what do we look like post-transaction?
00:16:29
Speaker
I that's important. It's also can come down to, a you know, just how they they communicate with the executive team of the new partnership. Is there similarities? Is there bond? Do they feel like they're mutually aligned? i think those are very key in evaluating the various companies, thus why we want them to come in and meet with physicians, have the opportunity to sit face-to-face with them. It seems to be key.
00:16:58
Speaker
So if I... it's swayed off there, bring me back and i can wrap up with the question. that's great. and And as you're talking about payer contracts that may be able to be improved given the volume of larger buyers.
00:17:16
Speaker
That makes me think it's a similar concept for supplies and volume discounts there, which especially if you're running an AC with specialties requiring a lot of supplies, that can also directly impact profit as well.
00:17:34
Speaker
Karanj, you're absolutely correct. And thanks for bringing that up because it's a very good point. Having been in the ambulatory surgery center industry for so long, independent facilities do not have the volume discounts and and access to supplies that we see from these large organizations. And I'm recently i working with a a spine center and even though they have great volume and doing very well, that is their one area that they struggle with because they, you know, they're doing maybe a thousand cases a year, but they're highly productive cases, but the cost of supplies,
00:18:12
Speaker
are probably 30% to 40% more than what they could get with a partner. So good point. And that really changes their performance, as you were saying. It does. Top line revenue, you know that i think we always say the three to four elements that really impact these operations is top line revenue. Then we have our staffing, which is another area that we try to target and manage to make sure we have appropriate staffing at the facilities. And then, our of course, our supply chain, that's very important.
00:18:46
Speaker
And last but not least, and we shouldn't forget about it, is the lease payments for these surgery centers and making sure we do a review because it's usually a very large, their fourth largest expense on their income statements.
00:19:01
Speaker
Yeah, great call-out. Okay, so let's let's imagine we we're working with an ASC, they've reviewed the LOIs, and there's a clear front-runner.
00:19:12
Speaker
And you're saying, hey, it's time to move forward to quality of earnings analysis. Can you share with the listeners what that is and ways they can reduce friction during that process?
00:19:26
Speaker
Correct. And I think having an advisor or assistance in this area is extremely helpful. And we'll have either will be done one of two ways, either in-house by the potential buyer, or they'll seek a third party that will go through them. And this is very typical. They'll have a third party that helps them with the quality of earnings. And the buyer, as you know, is doing this to assure that they have quote, at a fair market value price, that they're in fair market value range. The other is that the EBITDA supports, continues to support the EBITDA that they put their pricing, base their pricing on, right? Those are probably the two key factors of why we go through quality of earnings.
00:20:13
Speaker
And what I certainly like to see happen is to stay involved in that process, to assure that we don't get any, you know, we're close to close and we get a,
00:20:24
Speaker
well, wait a minute, we can't support the price that was put forth. We want to avoid any price adjustments for our clients or for the physician partners. So from that perspective, and i think this is where it's and important that we can assist in helping maintain that purchase price and providing some insight of do we need to do some one-time adjustments out of the financials? Can we take a look at the top line revenue? Are we missing something related to the growth of the facility going forward? So there's a lot of factors that go into it. A very key component of assuring the buyers that they are in fair market value for the purchase, but also letting the docs know that their their facility supports the EBITDA that was put forth.
00:21:16
Speaker
So that data is shared with with everyone as we move through this process. Yep. And so after after they finish QOE, the LOI is going to maybe remain the same or maybe slightly renegotiated, although, as you're saying, try to avoid that. Right. What what comes next after that?
Post-transaction Transition Phase
00:21:40
Speaker
Yes. And Grant, in the process of quality of earnings, there's so many things going on. Quality of earnings has taken place. Additional due diligence from on-site meetings to review IT, to review billing and collections, to review clinical processes, HR processes.
00:21:59
Speaker
All of that is happening maybe in this 90 days. So we've got a lot happening in the due diligence with that quality of earnings going on. But in addition, we have the the drafting of the legal documents, the definitive documents, whether that's the member interest purchase agreement,
00:22:18
Speaker
always going to see one of those in these transactions, referred to as a MIPA many times. We'll also see a new reinstated amended operating agreement for the facility.
00:22:29
Speaker
And then if there's management agreements and billing and collection agreements, they'll also be put forth as drafts to be negotiated and worked through.
00:22:40
Speaker
i will honestly tell you, Grant, that The legal documents are are the last piece in our final weeks that we're working on. And, you know, it where the lawyers get the tie their chance to, you know, nitpick back and forth. And we try to avoid as much of that as possible. But once we get through Q of u E, we finish up our our legal documents and we are set for a close.
00:23:06
Speaker
It sounds simple, but it is a long process. And post-close, what do you see as common steps after that? After post-close?
00:23:18
Speaker
in In this process also of due diligence, such, the initial buyer is is working through a transition plan. They're establishing what this next 60 days will look like at the facility the next six months, the next year. And what stages will they be implementing their different processes and procedures? So post-transaction, you know, I think that the key is that payroll is functioning and benefits are established for the staff.
00:23:50
Speaker
And then they move towards IT. And is there a change in the IT t systems as well as we're changing billing and collections from in-house to outsourcing, but they they don't,
00:24:03
Speaker
they don't just flip a switch and that happens overnight. It's it's a transition process and it's very well laid out for the facilities. This is a really great overview.
Financial Monitoring and Operational Support
00:24:15
Speaker
Anything else you would add for our listeners to understand the transaction process?
00:24:21
Speaker
Oh, you're having just got through close. And as we get to the close, I would just want to mention, I think there are,
00:24:33
Speaker
potentials for three or four hurdles that we want to avoid. And one of them we mentioned was quality of earnings and to share that that certainly evaluates out to our our needs.
00:24:46
Speaker
And then second of all is anything in those legal documents that's still going back and forth. We can get into some pretty intense negotiations on final negotiations there.
00:24:58
Speaker
The other is we didn't talk a lot about it, but it's hard to believe, but a lease agreement with an outside third party can provide some hiccups for us. Or even maybe it's a lease agreement. Many times these physicians own the real estate as well.
00:25:14
Speaker
It is a little easier to negotiate with the physician partners than it is with a third party, but we want to make sure that happens earlier and not be a oh, we need to look at the lease in the last week of our transaction.
00:25:30
Speaker
So we try to avoid some of those hiccups. But outside of that, staying on task, having a process and a timeline is extremely important too to getting through this process.
00:25:45
Speaker
We've covered a lot of actionable advice today, so thanks so much for sharing. Last question here to wrap us up, we ask this to each guest each week. What's one thing our listeners can do this week to improve their surgery centers?
00:26:01
Speaker
This week, I just went through this as from an administrator standpoint, overseeing a surgery center or even the doctors overseeing it. As you know, probably know, there are so many aspects of overseeing a surgery center.
00:26:17
Speaker
But I do think each week, if we can look at those areas that maybe need expert review, do we need to bring in outside evaluation for our billing and collections? Do we need a revenue cycle management audit? Should we have a financial audit?
00:26:37
Speaker
Always staying on top of that, but They wear so many hats of making sure staffing is there on time, maybe covering an OR, that from a day-to-day basis, this might be one reason why they're seeking a partner to help lift some of those daunting day-to-day tasks that are needed in a surgery center, have that assistance that'll help.
00:27:04
Speaker
But I would say, you know, this week, it's always good to assure people you're you're overlooking your financial status, timely reporting.
00:27:16
Speaker
It certainly helps evaluate where you're going and how your facility is doing if if there's not a lag in looking at the the financial side.
00:27:29
Speaker
Great. Thanks so much, Stephanie. Wow. Well, this was this was fun. Thank you, Grant. Appreciate it And hopefully it was helpful to some. I'm sure many.
00:27:40
Speaker
Thank you.
Insights from HST Pathways on Age Demographics
00:27:49
Speaker
Okay, so HST Pathways analyzed more than 5.3 million cases across over 600 surgery centers from Q1 2020 Q2 2025. And we took deeper look demographic trends benchmarks within that.
00:28:03
Speaker
and we took a deeper look at demographic trends and benchmarks within that So we're going to spend time today focusing on age mix because this is one of those simple data points that can tell you a lot about what's really happening in your ASC.
00:28:21
Speaker
Now you might just be able to look in your waiting room and have some sense for the age of patients, but being able to look at the data is going to help take it just from visual anecdotal views data backed view.
00:28:39
Speaker
So when you look at case share by age group, the headline is clear. Patients who are in the 61 to 80 range make up 48% of total cases, which is the largest portion of any age group.
00:28:55
Speaker
And in many centers, they're followed by the 41 to 60 age group, which accounts for 28% total cases. Now, when we look at both ends of the spectrum, patients under 21, they're representing about 6% of total cases, one of the smallest slices. And then when you look at patients 91 plus, they are less than of total volume.
00:29:26
Speaker
so so what does all this mean operationally first This age distribution explains why older patients dominate both or minutes and revenue in most surgery centers.
00:29:40
Speaker
Patients in the 61 to 80 range are more likely to need ortho procedures, ophthalmology, or other interventions that are probably higher acuity and longer in duration.
00:29:54
Speaker
Longer cases is going to mean that they're taking more block time and oftentimes higher reimbursement for case as well. That's why even if younger patients show up on your schedule consistently, they're going to be less likely to drive the bulk of your financial performance if you're a multi-specialty.
00:30:15
Speaker
That core economic engine is probably that 60 plus population for most ASCs. Second, this age distribution tends to mirror your specialty mix. So if your center is heavy in ortho or ophthalmology, your patient population is going to skew older.
00:30:35
Speaker
If you're more focused on ENT or dental, you're naturally going to see a younger demographic and probably even pediatrics as well. Neither of these models are better, but they do mean you need to operate a bit differently.
00:30:54
Speaker
older screening centers are going to need to think about anesthesia resourcing more, maybe core mobilities, the recovery time, whereas those that skew to a younger population, they're probably going to see faster turnovers in shorter cases, which may be impacting or utilization or reimbursement per case.
00:31:17
Speaker
And of course, understanding what model you're working with is going to impact things like staffing, scheduling, how you plan for growth and whatnot. There's also another strategic layer here. As the population continues to age, the 61 to 80 group is only going to continue to age too. So that means demand for high quality ASC care is going to continue to rise as more age into that category and as that category continues to age.
00:31:51
Speaker
So if your center is already serving that kind of population, you're probably in a good position. If not, this might be a signal to evaluate, do you have the right service line specialties block allocation physician recruitment and consider how that is going to play into your growth.
00:32:14
Speaker
When you think about day-to-day management, this data can also give you a gut check. A couple of questions to consider asking yourself. One, what percentage of your patients are aged 61 to 80?
00:32:29
Speaker
And is it over 40%? Also look at the case count there, not just patient count. And then look at the younger end. Are patients under 21 making up more than 10% of your cases?
00:32:43
Speaker
These two numbers alone can tell you a lot about your center's identity and whether you're being more Medicare driven or there's going to be more commercial or pediatric type cases.
00:32:59
Speaker
So if you haven't looked at your case distribution by age recently, it's a pretty simple report to pull and one that gives you a surprisingly clear picture of where the ASC today is and where you might head in the future.
Conclusion and Encouragement to Share
00:33:16
Speaker
That wraps up this week's podcast. Thanks as always for spending a few minutes with us. If you enjoyed this, please send it to a friend or a colleague in the ASC industry.
00:33:27
Speaker
We'd really appreciate you doing that because that's going to help us grow and hopefully help others improve their surgery centers as well. Have a great day and we'll see you next time.