Sources and Uses of Funds in M&A Transactions Explained

What Is the Sources and Uses Table?

The Sources and Uses of Funds table is a foundational component of every M&A and LBO transaction. This simple but essential schedule shows exactly where the money to complete a deal comes from (sources) and where that money goes (uses). The core principle is straightforward: sources must exactly equal uses, because every dollar spent must come from somewhere.

Understanding the Sources and Uses table matters because it serves as the starting point for more complex analyses. In an LBO model, you cannot calculate returns without first knowing how much equity the sponsor invested, which requires building Sources and Uses. In a merger model, you cannot determine accretion/dilution without understanding the financing structure. The Sources and Uses table translates deal terms into the financial structure that drives all subsequent analysis.

Investment banking analysts build Sources and Uses tables constantly. They appear in pitch books, confidential information memoranda, board presentations, and transaction documentation. For interviews, understanding this table demonstrates that you grasp how transactions are structured and financed, which is essential knowledge for both M&A and leveraged finance roles.

The Fundamental Principle: Balance

The Sources and Uses table operates on one inviolable rule: total sources must equal total uses. This is not a modeling convention but an accounting identity. If you need $1 billion to complete a transaction, you must raise exactly $1 billion to fund it. Any imbalance indicates an error.

This balance requirement makes the table self-checking. When building a Sources and Uses schedule, if your sources exceed your uses, you have excess cash that needs to go somewhere. If your uses exceed sources, you have a funding gap that must be filled. Either situation requires adjustment until the two sides balance perfectly.

In practice, one line item typically serves as the "plug" that balances the table. In LBO transactions, sponsor equity is usually the plug; the sponsor contributes whatever equity is needed after maximizing debt financing. In strategic M&A, cash on hand or a revolver draw often serves as the balancing item. Understanding which item plugs is essential for building accurate models.

This identity ensures that the transaction can actually close. Lenders and investors commit specific amounts, and those commitments must fund the total transaction requirements.

Uses of Funds: Where the Money Goes

The Uses side of the table captures everything that requires funding to complete the transaction. Each component represents a cash outflow at closing.

Purchase of Equity

The largest use in most transactions is the purchase of the target company's equity. This represents the amount paid to existing shareholders to acquire their ownership stakes.

For public company acquisitions, this equals the offer price per share multiplied by fully diluted shares outstanding. The offer price typically includes a premium over the current stock price, often ranging from 20% to 40% depending on deal dynamics. For private company acquisitions, the equity purchase price is the negotiated value for 100% ownership.

The purchase of equity is distinct from enterprise value. If you are buying a company for $500 million enterprise value but it has $100 million in existing debt you will assume or refinance, your equity purchase price is $400 million (assuming no excess cash).

Refinancing Existing Debt

Many transactions require paying off the target's existing debt at closing. Lenders rarely allow their loans to remain outstanding when ownership changes hands because change-of-control provisions typically trigger immediate repayment requirements.

Refinanced debt appears in uses because cash must flow to existing lenders to retire their claims. This debt is then replaced with new acquisition financing that appears in sources. The net effect may be similar leverage, but the mechanical flow requires showing both sides.

Some transactions allow existing debt to remain in place if lenders consent or if covenants permit the ownership change. In these cases, the assumed debt does not appear in uses (no cash outflow) but also does not appear in sources (no new funding). Understanding which approach applies requires reviewing actual credit agreements.

Transaction Fees

Every M&A transaction incurs advisory and professional fees that must be funded at closing:

For a $1 billion transaction, total fees might range from $15 million to $30 million depending on complexity. These fees are typically expensed rather than capitalized under current accounting rules (ASC 805), meaning they reduce retained earnings on the pro forma balance sheet.

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Financing Fees

If the transaction involves raising new debt, financing fees are paid to lenders and arrangers at closing. These fees differ from transaction fees because they relate to the debt financing rather than the M&A transaction itself.

Common financing fees include:

Financing fees are typically capitalized and amortized over the life of the debt rather than expensed immediately. They appear in Uses because cash must fund them at closing, but they create a deferred financing cost asset on the balance sheet.

For a $500 million debt package, financing fees might total $10 million to $20 million (2% to 4% of debt raised).

Other Uses

Depending on transaction structure, additional uses may include:

Sources of Funds: Where the Money Comes From

The Sources side captures all funding that enables the transaction. Each component represents capital committed to complete the deal.

Senior Secured Debt

The largest debt component in most leveraged transactions is senior secured debt, which holds the highest priority claim on company assets. This typically includes:

Term Loan B (TLB): Institutional term loans with bullet maturities (typically 7 years), minimal amortization (1% annually), and floating interest rates (SOFR plus a spread). TLBs are broadly syndicated to institutional investors like CLOs and loan funds.

Revolving Credit Facility: Committed but typically undrawn at closing, revolvers provide liquidity for working capital and general corporate purposes. While committed capacity appears in the credit agreement, only drawn amounts would appear in Sources if used at closing.

Term Loan A: Bank-held term loans with shorter maturities and higher amortization than TLBs. Less common in sponsor-backed deals but still used in certain transactions.

Senior secured debt is typically sized based on leverage multiples. A lender might commit to 4.0x first lien leverage, meaning if the target has $100 million EBITDA, senior secured debt capacity is $400 million.

Subordinated Debt

Below senior secured debt, subordinated debt provides additional leverage with higher returns to compensate for greater risk:

Second Lien Term Loans: Secured by the same collateral as first lien but with subordinated claim priority. Carries higher interest rates (typically 200-400 basis points above first lien) and may have payment subordination.

Mezzanine Debt: Unsecured debt subordinated to all senior obligations. Often includes equity warrants or conversion features to enhance lender returns. Interest rates of 12% to 18% are common.

High Yield Bonds: Publicly traded unsecured bonds with fixed coupons. Provide longer maturities and fewer maintenance covenants than bank debt but require SEC registration and take longer to execute.

Subordinated debt typically adds 0.5x to 2.0x additional leverage on top of senior secured debt, depending on market conditions and credit quality.

Sponsor Equity

In LBO transactions, sponsor equity represents the private equity firm's investment. This is typically the plug in the Sources and Uses table; after maximizing debt capacity, the sponsor contributes whatever equity is required to complete the transaction.

Sponsors target specific equity contributions based on fund size, diversification requirements, and return expectations. A typical sponsor equity check might represent 30% to 50% of total transaction value, though this varies significantly based on market conditions and deal characteristics.

Sponsor equity is the denominator in LBO return calculations. Minimizing equity (within prudent limits) maximizes returns because you are controlling the same asset with less invested capital.

Rollover Equity

Some transactions include rollover equity where existing shareholders retain a portion of their ownership rather than receiving full cash consideration. This is common when:

Rollover equity appears in both Sources and Uses. In Uses, it represents equity purchase price owed to the rolling party. In Sources, it represents their contribution of that same value back into the new structure. The net cash requirement is zero, but showing both sides maintains the integrity of the table.

Cash on Balance Sheet

In strategic M&A, the acquirer's existing cash often funds part of the transaction. Unlike LBOs where the target's cash stays with the business, strategic acquirers may use their corporate treasury to pay for acquisitions.

If an acquirer has $300 million of cash and wants to preserve $100 million for operations, $200 million of cash on hand can appear in Sources to reduce external financing needs.

Stock Consideration

Strategic acquirers often issue stock as transaction consideration, particularly for larger deals or when preserving cash is important. Stock consideration appears in Sources because it funds part of the purchase price without requiring cash.

Stock consideration affects pro forma share count and is a key driver of accretion/dilution analysis. Issuing stock avoids cash outflow but dilutes existing shareholders.

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Building a Sources and Uses Table: Step by Step

Step 1: Determine the Equity Purchase Price

Start with the total equity value being acquired. For public companies, this is offer price times fully diluted shares. For private companies, use the negotiated purchase price.

If the deal is structured on an enterprise value basis, back into equity value:

Step 2: Add Refinanced Debt

Determine whether existing target debt will be repaid or assumed. Add any debt requiring refinancing to Uses. This represents cash paid to existing lenders.

Step 3: Estimate Transaction Fees

Calculate advisory, legal, accounting, and other professional fees. Use percentage benchmarks (1-3% for advisory, fixed amounts for legal and accounting) adjusted for deal complexity.

Step 4: Calculate Financing Fees

If raising debt, estimate financing fees based on expected rates (typically 2-4% of debt raised). These are capitalized rather than expensed but require funding at closing.

Step 5: Total the Uses

Sum all Uses to determine total funding required:

Step 6: Determine Available Debt

Based on lender commitments and leverage multiples, determine total debt capacity. Break this into tranches (senior secured, subordinated, etc.) based on the financing structure.

Step 7: Identify Other Sources

Add any additional sources: rollover equity, cash on hand (for strategic deals), stock consideration, or other committed capital.

Step 8: Calculate the Plug

The balancing item (typically sponsor equity in LBOs or cash in strategic deals) equals total uses minus all other sources:

Step 9: Verify Balance

Confirm that total sources exactly equal total uses. Any difference indicates an error that must be corrected.

Example: LBO Sources and Uses

Consider a private equity firm acquiring a company with $100 million EBITDA at an 8.0x EBITDA enterprise value:

Uses of Funds:

Sources of Funds:

The sponsor equity of $260 million represents approximately 31% of total transaction value, which is typical for an LBO.

LBO vs. Strategic M&A: Key Differences

The structure of Sources and Uses differs meaningfully between LBOs and strategic acquisitions.

Leverage Levels

LBOs maximize debt to enhance equity returns, often reaching 5.0x to 7.0x total leverage. Strategic acquirers typically use conservative leverage to maintain investment-grade ratings, often below 3.0x total debt/EBITDA.

Funding Mix

LBOs rely primarily on new debt plus sponsor equity. Strategic deals often use existing cash, stock consideration, and modest incremental debt. The Sources side looks fundamentally different.

Equity Source

In LBOs, the equity source is clearly identifiable: the sponsor fund making the investment. In strategic deals, "equity" may be harder to identify; the acquirer's existing balance sheet and stock issuance fund the transaction without discrete new equity raising.

Treatment of Target Cash

LBOs typically leave target cash in place as working capital. Strategic acquirers may use target cash to fund the purchase, reducing net cash consideration. This affects how enterprise value translates to equity value in Uses.

Understanding these differences helps you recognize deal types and anticipate appropriate structures. For more on transaction types, see our guide on sponsor-backed vs. strategic M&A.

Common Interview Questions

"Walk Me Through a Sources and Uses Table"

"A Sources and Uses table shows where funding for a transaction comes from and where it goes. Uses include the purchase price for equity, refinancing existing debt if required, transaction fees paid to advisors, and financing fees paid to lenders. Sources include the various debt tranches funding the deal, any rollover equity from existing owners, and the equity contribution from the buyer, which is typically the plug that balances the table. Total sources must exactly equal total uses."

"Why Must Sources Equal Uses?"

"Sources must equal uses because it's an accounting identity. Every dollar spent to complete the transaction must come from somewhere. If uses exceed sources, you have a funding gap and cannot close the deal. If sources exceed uses, you have excess cash that needs to be allocated somewhere. In practice, one line item serves as the plug to ensure balance."

"What Typically Plugs in an LBO?"

"Sponsor equity typically plugs in an LBO. The sponsor first maximizes available debt financing based on leverage multiples and lender commitments. Whatever funding requirement remains after debt is filled by the sponsor's equity contribution. This approach minimizes equity invested, which maximizes returns for a given exit value."

"How Do Financing Fees Differ from Transaction Fees?"

"Transaction fees relate to the M&A deal itself: investment banking advisory fees, legal counsel, accounting diligence. These are typically expensed. Financing fees relate to raising debt: arrangement fees, commitment fees, original issue discount. These are typically capitalized and amortized over the debt term. Both require cash at closing and appear in Uses."

Common Mistakes to Avoid

Forgetting financing fees: New debt requires fees that must be funded at closing. Omitting these understates total uses and overstates equity returns.

Mishandling rollover equity: Rollover must appear in both sources and uses to maintain balance. Putting it in only one side creates an imbalance.

Confusing enterprise value and equity value: Uses should reflect equity purchase price, not enterprise value. Net debt must be accounted for separately.

Ignoring working capital adjustments: Many transactions include mechanisms for working capital true-ups that affect cash at closing.

Double-counting assumed debt: Debt that remains in place (not refinanced) should not appear in either sources or uses since no cash changes hands.

Key Takeaways

Conclusion

The Sources and Uses table is deceptively simple: just two columns that must balance. Yet this foundational schedule underpins every M&A and LBO analysis you will build. Understanding each component, how they interact, and why they matter demonstrates the transaction fundamentals that investment banking roles require.

When building Sources and Uses in practice, start with what you know (purchase price, committed debt) and solve for what you need (typically the equity plug). Verify balance before proceeding to more complex analyses. The discipline of building clean Sources and Uses tables translates directly to building accurate, auditable financial models.

For interviews, be prepared to walk through the table conceptually, explain why each item appears where it does, and discuss how different deal structures affect the analysis. This knowledge applies whether you're discussing LBO mechanics, merger models, or transaction structuring with senior bankers.