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Sources and Uses

In an LBO model the sources and uses table is a convenient way to track the sources and uses of cash required to close a transaction. Building a sources and uses table can appear to be a process that is without a proper sequence, but there is definitely an order that can be followed. To understand it, let’s first explore concise definitions of the two terms. Think of sources and uses as follows:

Sources: The sources of cash required to consummate the transaction.

Uses: The cash used satisfy all claimants of the target company so that ownership can be transferred (enterprise value or purchase price) and to pay all of the fees associated with the transaction. Total uses will be equal to enterprise value plus all fees.

Under Uses we need to further define claimants and fees, because in both instances there will be two types.

Claimants will need to be divided between shareholders (target company equity holders / “Seller Proceeds” in the table below) and creditors (target company debt holders / “OldCo Debt” in the table below). Enterprise Value – OldCo Debt = Seller Proceeds. Another way to think about Seller Proceeds is that this is the sum required to purchase the target company’s equity.

Fees will be divided between transaction expenses and financing fees.

With these definitions in mind, we can establish a sequence. The image below pulls data from the LBO Case Study to complete the sources and uses table. The steps are outlined below the image and a video at the bottom of this post walks through the process in detail.

SEQUENCE (All of the “video links” included in the outline are timestamps for the YouTube video available below.)

1. Establish Purchase Price: EBITDA x EBITDA Multiple [Video Link]
2. Sources and Uses: Estimate Debt Available to Finance the Acquisition and Financing Fees (Note: Use Term Sheets if Available.) [Video Link]
3. Uses: Identify Debt Balances of the Target Company to be Paid Off (Satisfy Debt Holders) [Video Link]
4. Uses: Estimate Transaction Expenses [Video Link]
5. Uses: Calculate Total Capital Required to Close (Sum of Purchase Price and Fees)
6. Uses: Calculate Seller Proceeds (Cash Required to Purchase Target Company Equity) [Video Link]
7. Sources: Set Total Sources Equal to Total Uses
8. Sources: Calculate Equity Required to Close (Total Sources – Debt Available) [Video Link]

In the video available below I build a Sources and Uses table for the LBO Case Study as part of a live “Watch-Me-Build-It-Series.” As a visual for this sequence I have included timestamps below the video to make it easy to reference.