Sources & Uses in M&A and LBOs: Complete Walkthrough

Why Sources & Uses Is a Foundational Deal Concept

The sources and uses table is one of the first things you build in any M&A or LBO analysis. It answers two simple questions: where is the money coming from (sources), and where is it going (uses)? Despite its simplicity, the sources and uses table is a surprisingly common interview topic -- and getting it wrong reveals that you do not understand how deals are actually structured.

This guide walks through the mechanics of building a sources and uses table for both M&A and LBO transactions, complete with numerical examples. By the end, you will be able to construct one from scratch and handle any related interview question.

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The Basic Framework

Every deal requires money to fund it. The sources and uses table is a simple accounting identity:

Total Sources = Total Uses

This must always balance. If you are paying $1 billion for a company and spending $50 million on transaction fees, your total uses are $1.05 billion, and your sources must add up to exactly $1.05 billion.

Uses: Where the Money Goes

The uses side answers: what are we spending money on? Common line items include:

• Purchase enterprise value. The total price paid for the target company. In a stock deal, this is the implied equity value plus assumed debt. In a cash deal, it is the cash paid for the equity plus assumed or refinanced debt.
• Refinancing existing debt. If the acquirer pays off the target's existing debt at closing (common in LBOs), that amount is a use of funds.
• Transaction fees. Advisory fees (to the investment bank), financing fees (to lenders), legal fees, accounting fees, and other closing costs. These typically range from 1-3% of the deal value in aggregate.
• Financing fees. Fees paid to banks for arranging the debt. These are sometimes amortized rather than expensed upfront, depending on the fee type (OID vs. upfront fees).
• Cash to balance sheet. If the buyer wants the acquired company to have a minimum cash balance post-close, that is a use of funds.

Sources: Where the Money Comes From

The sources side answers: how are we funding the deal? Common line items include:

• Debt. Senior secured debt (revolving credit facility, term loans), subordinated debt, high-yield bonds, mezzanine financing. Each tranche has different terms, costs, and priority in the capital structure.
• Equity contribution. The buyer's own money. In an LBO, this is the sponsor's equity check. In a strategic M&A deal, this might be the acquirer's cash on hand or proceeds from a new equity issuance.
• Rollover equity. If existing shareholders (often management) reinvest part of their proceeds back into the new entity, this counts as a source.
• Target's excess cash. If the target has cash on the balance sheet that will be used to fund part of the purchase price, it appears as a source.
• Seller financing. Sometimes the seller provides a loan to the buyer, effectively financing part of the deal.
• Stock consideration. In a stock-for-stock or mixed deal, the acquirer's shares issued to the target's shareholders are a source of funding.

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Sources & Uses in an M&A Transaction

Let us walk through a concrete example. Suppose Company A (the acquirer) is buying Company B (the target) for $2.0 billion in enterprise value.

Setting Up the Uses

| Uses | Amount ($M) | |------|-------------| | Equity Purchase Price | 1,700 | | Refinance Target Debt | 250 | | Advisory & Legal Fees | 30 | | Financing Fees | 20 | | Total Uses | 2,000 |

Here, the target has $250 million of existing debt that the acquirer will pay off at closing. The equity purchase price is the EV ($2,000M) minus the existing debt ($250M) minus cash on the target's balance sheet (assume $50M in excess cash that reduces the equity check). So: $2,000 - $250 - $50 = $1,700M paid to shareholders, plus $250M to retire debt, plus $50M in fees.

Wait -- let me redo this more clearly. The EV of the target is $2.0 billion. The target has $250M in debt and $50M in cash, so equity value = $2,000 - $250 + $50 = $1,800M. The uses reflect the total funding needed:

| Uses | Amount ($M) | |------|-------------| | Equity Value (to shareholders) | 1,800 | | Retire Existing Debt | 250 | | Transaction Fees | 30 | | Financing Fees | 20 | | Less: Target Cash Used | (50) | | Total Uses | 2,050 |

Setting Up the Sources

Now the acquirer needs to raise $2,050 million. Suppose it uses a mix of cash, new debt, and stock:

| Sources | Amount ($M) | |---------|-------------| | Cash on Hand | 500 | | New Term Loan | 800 | | New Bond Issuance | 400 | | Stock Issued to Target Shareholders | 350 | | Total Sources | 2,050 |

Sources equal uses. The table tells you exactly how the deal is financed and how the proceeds are distributed.

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Sources & Uses in an LBO

The leveraged buyout is where the sources and uses table really shines, because LBOs involve complex capital structures with multiple layers of debt. Let us walk through an example.

The Setup

A private equity firm is acquiring a company for $3.0 billion in enterprise value. The target has:

• $200 million in existing debt (to be refinanced)
• $100 million in cash
• EBITDA of $500 million (so the acquisition is at 6.0x EV/EBITDA)

The PE firm plans to use a leveraged capital structure with 4.0x total debt/EBITDA.

Building the Uses

| Uses | Amount ($M) | |------|-------------| | Enterprise Value | 3,000 | | Refinance Existing Debt | 200 | | Financing Fees (2% of debt) | 40 | | Transaction / Advisory Fees | 35 | | Total Uses | 3,275 |

Note: we include the existing debt payoff as a separate use because the PE firm will replace it with new debt on more favorable terms (or as part of the new capital structure). The target's $100 million in cash is typically netted against the purchase price or shown as a source.

Building the Sources

The PE firm targets 4.0x total leverage, meaning $2,000M in total debt ($500M EBITDA x 4.0x):

| Sources | Amount ($M) | |---------|-------------| | Revolving Credit Facility (drawn) | 0 | | Senior Term Loan A | 750 | | Senior Term Loan B | 750 | | Senior Unsecured Notes | 500 | | Sponsor Equity | 1,175 | | Target Excess Cash | 100 | | Total Sources | 3,275 |

Let us verify: Total debt = $750 + $750 + $500 = $2,000M = 4.0x EBITDA. The revolver is typically undrawn at close (reserved for working capital). Sponsor equity is the plug: $3,275 - $2,000 - $100 = $1,175M.

Why the Sponsor Equity Amount Matters

The sponsor equity check directly determines the fund's returns. In this case, the PE firm invests $1,175M. If the company grows and the firm exits at a higher enterprise value (say 7.0x EBITDA after growing EBITDA to $650M), the exit EV would be $4,550M. After repaying debt (which has been partially paid down), the equity proceeds could be substantially higher than $1,175M, generating a strong IRR.

This is why the debt-to-equity mix in the sources table is so critical to LBO returns. More leverage means a smaller equity check, which amplifies returns (but also increases risk).

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Key Differences Between M&A and LBO Sources & Uses

| Dimension | M&A Deal | LBO | |-----------|----------|-----| | Primary equity source | Acquirer's cash/stock | Sponsor equity fund | | Debt levels | Moderate (if any new debt) | High (4-6x EBITDA typical) | | Existing debt treatment | Often assumed or refinanced | Almost always refinanced | | Stock as consideration | Common (especially large deals) | Rare (all-cash transactions) | | Rollover equity | Uncommon | Common (management rolls 5-15%) | | Financing fees | Lower (less debt) | Higher (more and riskier debt) |

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Common Interview Questions on Sources & Uses

"Walk me through a sources and uses table for an LBO."

Start with uses: purchase enterprise value, plus refinancing existing debt, plus transaction and financing fees. Then sources: new debt (sized as a multiple of EBITDA), sponsor equity (the plug), and potentially rollover equity or target cash. Emphasize that sources must equal uses.

"What is the sponsor equity, and how do you calculate it?"

Sponsor equity is the residual -- total uses minus all debt sources minus any other non-equity sources (rollover, target cash). It is the amount the PE fund must contribute from its own capital.

"Why do we refinance existing debt in an LBO?"

The sponsor wants to optimize the capital structure for the new ownership. Existing debt may have restrictive covenants, unfavorable interest rates, or change-of-control provisions that trigger repayment anyway. New debt is tailored to the LBO structure.

"Where do financing fees go?"

Financing fees are a use of funds. They are typically capitalized on the balance sheet and amortized over the life of the debt. Advisory fees hit the income statement or reduce equity on the balance sheet, depending on accounting treatment.

"If the target has excess cash, how does it affect the sources and uses?"

Excess cash can appear either as a reduction to the uses side (netting it against the purchase price) or as a source (the target's cash is used to help fund the deal). Either approach is acceptable as long as the table balances. In practice, most models show it as a source for clarity.

"How do transaction fees affect the returns in an LBO?"

Higher fees increase total uses, which means the sponsor needs either more debt or more equity. If the equity check is larger, the returns (IRR and MOIC) decrease because the sponsor invested more money. This is why PE firms negotiate hard on advisory and financing fees.

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Building a Sources & Uses Table: Step-by-Step Checklist

Here is a practical checklist you can follow when building a sources and uses table in a model:

1. Determine the purchase enterprise value. This is the starting point. Apply the acquisition multiple to EBITDA or use the negotiated price.

2. Identify existing debt to be retired. Review the target's balance sheet for all outstanding debt. Check for change-of-control provisions and prepayment penalties.

3. Estimate transaction fees. Advisory fees (typically 0.5-1.5% of EV for large deals), legal and accounting fees, and any other deal costs.

4. Estimate financing fees. Typically 1-3% of total new debt. Depends on the risk profile and debt market conditions.

5. Sum the uses. Add all items above.

6. Structure the debt. Size each tranche based on leverage multiples and lender appetite. Common LBO structure: senior secured (2-3x EBITDA), senior unsecured or subordinated (1-2x EBITDA).

7. Identify other sources. Target cash, rollover equity, seller financing.

8. Calculate sponsor equity. Total uses minus all other sources. This is always the plug.

9. Verify the balance. Total sources must equal total uses. If they do not, you have an error somewhere.

10. Sanity check. Is the equity contribution reasonable (typically 30-50% of EV in an LBO)? Is total leverage within market norms (4-6x for most deals)?

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Practice Makes Perfect

The sources and uses table is deceptively simple in concept but requires precision in execution. One misplaced line item throws off the entire deal model. The best way to master it is practice: build tables for hypothetical deals, vary the assumptions, and trace through how changes in one line item ripple through the rest.

IB Flash has dedicated practice sets covering sources and uses, LBO mechanics, and deal structuring. Drill these concepts until building a sources and uses table feels automatic -- because in a live deal, it needs to be.