Published January 24, 2024
Sources and Uses
The Sources and Uses is such a clever, harmonious way to lay out how any major purchase is financed. Outside of thousands of LBOs, I’ve used it in my personal life when financing anything major (e.g., purchasing my house, car, financing HBS, wedding, honeymoon, etc.).
I had a boss who used to say, “when in doubt, lay it out.”
And that’s what the Sources and Uses table is – a clearly laid out, comprehensive schedule listing:
Each item you’re purchasing / paying for in a transaction (the “Uses”); and
Each capital source you’re using to pay for them (the “Sources”)
The two sides must equal. No more, no less. The Uses must list out 100% of the things you need to pay for to get this specific deal done, and the Sources in aggregate must cover every penny you need to fund those Uses – but not a single penny more. You would not show, for example, additional sources of capital available to you or the firm over and above the amount required to fully fund the Uses.
Typical components of transaction Uses include:
The Purchase Price / Total Enterprise Value (“TEV”) of the acquired business (or acquired security in the case of minority investments). This should be the largest component of the uses by far.
Transaction fees incurred to close the deal (e.g., legal, quality of earnings, consultants, etc.). We typically separate these out from financing-related fees (discussed below) for the purpose of calculating unlevered metrics.
Financing fees incurred to close a levered transaction (e.g., underwriter fees on new debt, make whole payments on existing debt that is refinanced as part of the transaction, etc.).
Typical components of transaction Sources include (listed in descending order of seniority):
Common Equity. Because total sources must equal total uses, most models (including Mosaic’s) solve for the common equity requirement instead of entering it as an input. This is colloquially referred to as the “plug” and can be calculated as: (Total Uses – sum of total sources excluding common equity). Detailed, later-stage LBO models may break down common equity into tranches held by different shareholders or shareholder groups. Some examples of common groupings and subgroupings are:
Sponsor Equity. The tranche of equity controlled by the private equity sponsor. Can be split up amongst members of the sponsor group, including:
Fund equity – the amount placed in the fund of the sponsor.
Coinvest equity – equity provided by LPs of the sponsor outside of their fund.
Co-sponsor equity – an amount covered by a co-bidder in the case where two GPs are acquiring the same asset together.
Management Roll. Company management teams (e.g., CEO, CFO, CTO, etc.) may own significant equity in a target company and may decide to “roll” some of their ownership into the next deal.
Seller Roll. Selling private equity firms may choose to retain some portion of their equity in a transaction.
Always ensure that Total Sources = Total Uses, and that only one line item is the “solved” or “plugged” value to avoid circularity issues. Typically, common equity is the plug.
In Excel, “best practice” is to link Total Sources to Total Uses, Calculate Total Debt, and have Equity be a solved formula where Equity = Total Uses – Total Debt.
Always ensure that each “Source” of capital has a matching entry in the Exit & Returns schedule.