Sources & Uses
Building the table that balances every dollar flowing into and out of an LBO transaction
~20 min read
Every LBO begins with a single question: where does the money come from, and where does it go? The sources and uses table is the answer. It is the first thing you build in any LBO model, and it is the framework that ensures every dollar is accounted for. The table has two columns that must balance exactly: the left side lists every source of capital (equity, debt tranches, rollover equity), and the right side lists every use of that capital (purchase price, transaction fees, debt refinancing, cash to balance sheet).
If you have ever balanced a personal budget or reconciled a bank statement, the concept is identical. Sources = Uses. No dollar appears without a destination, and no expense is funded without a source. This discipline is what makes the LBO model internally consistent and auditable.
The Balancing Principle
The sources and uses table must balance to the penny. Total sources of capital must exactly equal total uses of capital. If they do not balance, there is an error somewhere in the model. This is not a convention; it is an accounting identity. Every dollar raised (source) must be deployed somewhere (use), and every dollar spent (use) must be funded by something (source). In practice, the 'plug' that forces the balance is usually the sponsor equity contribution: once all debt sources and all uses are determined, the equity check is calculated as the residual (Total Uses minus Total Debt Sources minus Rollover Equity).
The sources side of the table answers: who is providing the money? There are typically three to five line items:
1. Senior Secured Debt (Term Loan B)
The largest debt component, usually 3-5x EBITDA. Provided by a syndicate of banks and institutional investors (CLOs, credit funds). This debt is secured by the company's assets and has the highest repayment priority. Pricing is typically SOFR + 300-500 bps.
2. Subordinated Debt / Mezzanine / Second Lien
Junior debt that sits below the senior loan in the capital structure. It carries a higher interest rate (SOFR + 600-900 bps or fixed 10-14%) to compensate for the additional risk. Not every deal includes subordinated debt; it depends on the total leverage needed and market conditions.
3. Sponsor Equity
The PE fund's cash contribution. This is the equity check. In a typical deal, it represents 30-50% of the total enterprise value. The equity check is the amount that determines the fund's return.
4. Rollover Equity
Existing shareholders (often the founder or management team) may 'roll over' a portion of their ownership into the new deal rather than cashing out entirely. Rollover equity counts as a source because it reduces the amount of new capital needed. It also aligns the interests of management with the new sponsor.
5. Seller Note (occasionally)
The seller may agree to finance a portion of the purchase price, accepting a promissory note instead of immediate cash. Seller notes are less common in PE but appear in smaller deals or when financing markets are tight.
The uses side of the table answers: where does the money go? There are typically three to five line items:
1. Purchase Price (Enterprise Value)
The price paid for 100% of the company's equity plus the assumption of its net debt. This is almost always the largest line item. It is calculated as EBITDA x Entry Multiple (for example, $100M EBITDA x 10x = $1B enterprise value).
2. Transaction Fees
The advisory, legal, accounting, and financing costs associated with closing the deal. These typically run 2-4% of enterprise value. Major components include investment banking advisory fees (1-2% of EV), legal fees for buyer and seller counsel, accounting and tax advisory, debt financing fees (1-3% of debt raised), and due diligence expenses.
3. Refinancing Existing Debt
If the target company has existing debt that must be repaid at closing (because the acquisition triggers a change-of-control provision), the payoff amount appears as a use. The new acquisition debt replaces the old debt.
4. Cash to Balance Sheet
Some transactions require the acquirer to leave a minimum cash balance on the company's balance sheet at closing to fund working capital needs. This is typically a modest amount ($5-20M for a mid-market deal).
5. Debt Issuance Costs (OID)
Original issue discount and other costs associated with placing the new debt. These are sometimes netted against the debt proceeds on the sources side rather than shown as a separate use. The treatment depends on accounting conventions and the modeler's preference.
Sources & Uses: Acquiring WidgetCo for $500M
WidgetCo has $62.5M of EBITDA. A PE sponsor is acquiring it at 8.0x EBITDA, or $500M enterprise value. The company has $50M of existing debt that must be refinanced. Transaction fees are estimated at $18M (3.6% of EV). The lenders have committed to 5.0x EBITDA of senior debt ($312.5M). Management is rolling over $25M of equity.
Uses:
- Purchase Price (Enterprise Value): $500.0M
- Refinance Existing Debt: $50.0M
- Transaction Fees: $18.0M
- Cash to Balance Sheet: $7.0M
- Total Uses: $575.0M
Sources:
- Senior Term Loan (5.0x EBITDA): $312.5M
- Rollover Equity: $25.0M
- Sponsor Equity (plug): $575.0M - $312.5M - $25.0M = $237.5M
- Total Sources: $575.0M
Notice that Total Sources = Total Uses = $575.0M. The sponsor equity is the residual: total uses minus all other sources. The sponsor is writing a $237.5M equity check, which represents 47.5% of the $500M enterprise value. If the sponsor wanted to reduce the equity check, it could seek additional debt financing (subordinated debt or mezzanine) or negotiate more management rollover.
Illustrative example
| Sources (Where $ Comes From) | Uses (Where $ Goes) | |
|---|---|---|
| Line items | Senior debt, sub debt/mezz, sponsor equity, rollover equity, seller note | Purchase price, transaction fees, refinance existing debt, cash to B/S, OID |
| Largest item | Senior debt (typically 50-60% of total) | Purchase price (typically 85-90% of total) |
| Residual / plug | Sponsor equity (calculated last to force balance) | No plug needed; all uses are known inputs |
| Key ratio to track | Debt / EBITDA (total leverage) | Fees as % of EV (deal cost efficiency) |
The sources and uses table is the starting point of every LBO model. It establishes the capital structure at closing (how much debt, how much equity), determines the sponsor's equity check, and ensures that every dollar is accounted for. Once you have a balanced sources-and-uses table, you can move forward to project the company's operating performance, build a debt schedule, and calculate returns. In the next lesson, we will use these concepts to build a paper LBO: the quick, mental-math version of an LBO that PE professionals use to evaluate deals in minutes, not days.
Quiz: Sources & Uses
6 questions · ~3 min