Sources and Uses of Funds in an LBO

Introduction

The sources and uses table is the starting point of every LBO model. It maps out exactly where the money comes from (sources) and where it goes (uses) at the moment of the transaction's closing. The two sides must balance perfectly: every dollar spent must be funded by a specific source of capital.

This table determines the capital structure of the post-LBO company, which directly affects the sponsor's equity check, the interest expense burden, the debt repayment schedule, and ultimately the IRR and MOIC that the deal generates.

The uses side answers: "Where does all the money go at closing?"

Equity Purchase Price

The largest component. Calculated as the offer price per share x the target's diluted shares outstanding, this represents the total amount paid to the target's shareholders. In a take-private transaction, this includes any control premium above the undisturbed stock price.

Existing Debt Refinancing

Most LBOs refinance (repay) the target's existing debt and replace it with a new, optimized debt structure tailored to the sponsor's capital plan. The existing debt balance at closing is a use of funds because it must be repaid.

Transaction Fees and Expenses

Transaction costs fall into two categories that are treated differently in the model:

Advisory and transaction fees: Investment banking advisory fees, legal fees, accounting and due diligence fees, and other professional services costs. These are typically estimated at 2-2.5% of the purchase enterprise value. On a $1 billion deal, advisory fees might total $20-25 million. These fees are a use of funds (they must be paid at closing) and are typically expensed rather than capitalized, meaning they reduce Day 1 equity on the pro forma balance sheet.

Financing fees: Arrangement fees, commitment fees, and underwriting fees paid to the banks that provide the acquisition debt. These are typically 2-3% of the total debt commitment. On $600 million of debt, financing fees might total $12-18 million. Unlike advisory fees, financing fees are capitalized on the balance sheet as deferred financing costs and amortized over the life of the debt, creating a non-cash expense that provides a tax benefit over time.

The distinction between advisory fees (expensed) and financing fees (capitalized) matters for the LBO model because it affects both the Day 1 balance sheet and the ongoing income statement. Interviewers occasionally test this distinction.

The sources side answers: "Where does the money come from?"

Debt Financing

The majority of the purchase price in an LBO is funded with debt, typically 50-70% of total sources. The debt is structured in layers with different seniority, cost, and terms, detailed in LBO Debt Structures:

Sponsor Equity

The residual amount that the sponsor must contribute from its fund. Equity = total uses minus total debt financing. The equity check typically represents 30-50% of the total purchase price in the current market environment.

Equity Check

The total cash equity contribution the private equity sponsor must invest from its fund to complete the LBO. Calculated as total uses of funds minus total debt financing (and minus any other non-sponsor equity sources like management rollover or co-invest). The equity check is the denominator in all return calculations: the IRR and MOIC are both measured relative to this initial investment. A smaller equity check (enabled by higher leverage) amplifies returns when the deal performs well but increases the risk of loss. Fund economics also constrain the equity check: a $5 billion fund making a $500 million equity investment has committed 10% of the fund to a single deal, which may exceed concentration limits in the fund's limited partnership agreement.

Other Sources

Management rollover deserves particular attention because it serves a dual purpose. First, it reduces the sponsor's equity check, directly improving returns. If management rolls $50 million of equity, the sponsor invests $50 million less, and the returns on the sponsor's smaller equity base are amplified. Second, rollover aligns management's incentives with the sponsor's by ensuring management has "skin in the game." A CEO who rolled $10 million of personal equity into the deal is strongly motivated to execute the value creation plan because their personal wealth depends on the exit outcome. Most PE firms require the CEO and senior management team to roll a meaningful portion of their equity (often 25-75% of their proceeds) as a condition of the deal.

Sources and Uses Table

A balanced table in an LBO model that maps every source of financing (debt tranches, sponsor equity, rollover equity) against every use of funds (equity purchase price, debt refinancing, transaction fees). Total sources must equal total uses. The table establishes the post-LBO capital structure and determines the sponsor's equity check, which is the denominator for all return calculations. Changes to the sources and uses directly affect the LBO's IRR and MOIC.

In this example, the total leverage is $650 million / $100 million EBITDA (assuming $100M EBITDA) = 6.5x. The sponsor's equity check is $300 million, and the total equity (including management rollover) is $350 million. Note how the equity check ($300M) is the residual after all debt sources are maximized. The sponsor does not choose how much equity to contribute; it contributes whatever is left after debt capacity is exhausted. This is why debt market conditions are so critical to LBO economics: in a tighter credit market, the same deal might support only $500 million in total debt, increasing the equity check to $450 million and fundamentally changing the return profile.

For context, the Electronic Arts $55 billion take-private in 2025 (the largest LBO in history) used approximately a one-third debt, two-thirds equity split, with JPMorgan providing approximately $20 billion in debt financing. At that scale, the sources side included senior secured term loans, a revolving credit facility, and high-yield bonds, with the Saudi PIF, Silver Lake, and Affinity Partners collectively contributing approximately $36 billion in equity.