Uses first, debt second, equity as the plug: a buyout's sources and uses worked line by line, and the 25.0 of non-price uses that a quick EV minus debt forgets.
List every use of cash at closing, size the debt, and let equity balance the table. In the illustrative case of The Buyout Investor, 450.0 of enterprise value plus 25.0 of fees and cash makes 475.0 of uses; 275.0 of debt at 5.5x EBITDA leaves an equity cheque of 200.0, 42.1 per cent of total sources, and not the 175.0 that enterprise value minus debt suggests.
Worked in full in The Buyout Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The sources and uses table is the first page of every LBO model and the first question in most buyout interviews. It answers one thing: how much money has to arrive on closing day, and from whom. The order of work matters. Uses are fixed by the price and the deal costs, sources by what lenders will provide, and the equity is whatever is left.
| Input | Value |
|---|---|
| Underwriting EBITDA (reported plus accepted adjustments) | 50.0 |
| Entry multiple, EV / EBITDA | 9.0x |
| Bank debt repaid at closing | 40.0 |
| Debt-like items: finance leases, unpaid litigation settlement | 3.0 + 2.0 |
| Cash on the target's balance sheet | 10.0 |
| Transaction fees: advisory, diligence, legal | 4.5 + 3.0 + 2.0 |
| Financing fees, share of funded debt | 2.0% |
| Minimum cash funded at closing | 10.0 |
| First-lien term loan B / second lien, x EBITDA | 4.5x / 1.0x |
| Management rollover | 10.0 |
The seller is paid for the equity, not the enterprise value. The 450.0 headline is split between the shareholders and the holders of the target's debt.
Enterprise value = 9.0 × 50.0 = 450.0
Net debt and debt-like items = 40.0 + 3.0 + 2.0 − 10.0 = 35.0
Equity purchase price = 450.0 − 35.0 = 415.0
Financing fees = 2.0% × 275.0 = 5.5
The target's own 10.0 of cash goes towards the 45.0 of debt and debt-like items, so the buyer funds 35.0 of refinancing. The business still needs 10.0 to operate the day after closing, so the deal funds it afresh. That line is easy to miss: it is a use of the buyer's money even though it stays inside the company.
| Uses | Amount | Sources | Amount |
|---|---|---|---|
| Purchase of the equity | 415.0 | First-lien term loan B (4.5x) | 225.0 |
| Refinancing of net debt | 35.0 | Second-lien loan (1.0x) | 50.0 |
| Transaction fees (expensed) | 9.5 | Revolver drawn | 0.0 |
| Financing fees (capitalised) | 5.5 | Management rollover | 10.0 |
| Cash to the balance sheet | 10.0 | Sponsor equity | 190.0 |
| Total uses | 475.0 | Total sources | 475.0 |
Total equity = total uses − total debt = 475.0 − 275.0 = 200.0
Sponsor equity = 200.0 − 10.0 of rollover = 190.0
In Excel: =SUM(Uses)-SUM(Debt_Sources) for the equity, and a check cell =SUM(Sources)-SUM(Uses) that must read zero.
Read the ratios off the finished table. Debt is 5.5x EBITDA gross and 5.3x net of the 10.0 of cash, 57.9 per cent of sources and 61.1 per cent of enterprise value. Equity is 42.1 per cent of total sources. The fees of both kinds come to 15.0: 3.33 per cent of the price, but 7.5 per cent of the equity, because the lenders do not share them. The management rollover is equity like any other and sits in the same line; it shrinks the sponsor's cheque, not the total.
The order of work: uses from the price and the costs, debt from the lenders' sizing, equity last. Never size the debt as a share of total uses: the financing fee then depends on the debt and the debt on the fee, and you have built a circular reference for nothing.
Because equity is the residual, every change in price falls on it in full, and every change in debt falls on it almost in full.
| Entry multiple | EV | Total uses | Equity | Equity share |
|---|---|---|---|---|
| 8.0x | 400.0 | 425.0 | 150.0 | 35.3% |
| 8.5x | 425.0 | 450.0 | 175.0 | 38.9% |
| 9.0x | 450.0 | 475.0 | 200.0 | 42.1% |
| 9.5x | 475.0 | 500.0 | 225.0 | 45.0% |
| 10.0x | 500.0 | 525.0 | 250.0 | 47.6% |
One turn of price is 50.0 of enterprise value (one times EBITDA), and with the debt unchanged it is 50.0 more equity, a 25.0 per cent larger cheque for the same company. That is why the IRR cost of overpaying is larger than a table that resizes the debt with the price would suggest, a point worked in how much IRR one more turn of entry multiple costs.
| Debt / EBITDA | Debt | Financing fees | Total uses | Equity | Equity share |
|---|---|---|---|---|---|
| 4.5x | 225.0 | 4.5 | 474.0 | 249.0 | 52.5% |
| 5.0x | 250.0 | 5.0 | 474.5 | 224.5 | 47.3% |
| 5.5x | 275.0 | 5.5 | 475.0 | 200.0 | 42.1% |
| 6.0x | 300.0 | 6.0 | 475.5 | 175.5 | 36.9% |
| 6.5x | 325.0 | 6.5 | 476.0 | 151.0 | 31.7% |
Each extra half-turn of debt saves 24.5 of equity rather than 25.0, because the lenders charge their fee on it. Total uses barely move; only the mix does.
The quick answer, enterprise value minus debt, gives 450.0 − 275.0 = 175.0. It is short by 25.0, the fees and the funded cash, so the true cheque is 14.3 per cent larger than the shortcut says. Every return computed on 175.0 is overstated: the MOIC by the same 14.3 per cent, and the IRR with it. The second mistake is quoting equity as a share of enterprise value. Here that reads 44.4 per cent; the share of what was actually funded is 42.1 per cent. Lenders, investment committees and the paper LBO in how to solve a paper LBO by hand all work from total sources.
A third, quieter error is double counting cash: deducting the target's 10.0 in net debt and then also treating it as available to fund fees. It cannot do both. Either it repays debt or it stays as operating cash; in this case it repays debt and the deal funds new operating cash.
Uses first, debt second, equity last: 475.0 of uses less 275.0 of debt is 200.0 of equity, of which management rolls 10.0 and the fund writes 190.0. Twenty-five of that 200.0 buys nothing on the enterprise value line, and the return has to earn it back. The live sources and uses of this case, and a blank sheet that balances itself, are in the free workbook for this case; a ready-made five-year version is in the LBO model template.
Because lenders size the debt first, on a multiple of EBITDA or on interest cover, and the price is agreed with the seller. Whatever the uses cost beyond the debt raised has to come from the sponsor and any rollover. In the case here 475.0 of uses less 275.0 of debt leaves 200.0 of equity; raise the price one turn and the cheque rises by the full 50.0.
Yes. Advisory, diligence and legal fees (9.5 here) and financing fees on the new debt (5.5, at 2 per cent of 275.0) are uses of cash at closing. Together they are 15.0, 3.33 per cent of enterprise value but 7.5 per cent of the equity, because the equity funds them alone. Leaving them out understates the cheque and overstates the MOIC.
It depends on price and leverage, not on a rule. In this illustrative case equity is 42.1 per cent of total sources at 9.0x entry and 5.5x debt. Hold the debt and pay 10.0x and the share rises to 47.6 per cent; borrow 6.5x at 9.0x and it falls to 31.7 per cent. Quote the share of total sources, not of enterprise value, which reads 44.4 per cent here.
This article is one calculation from The Buyout Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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