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Sources and Uses of Funds

Sources & Uses Table

Sources Side

Senior debt, mezzanine, sponsor equity, target rollover, cash on hand.

Uses Side

Purchase price, refinanced debt, transaction fees, financing fees.

Must Balance

Total sources must equal total uses — first sanity check on a deal model.

Drives Returns

Capital structure here flows directly into LBO returns calculation.

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Explore the intricacies of the Sources and Uses table in M&A transactions, including its role in detailing the total cost of a target acquisition and the breakdown of necessary funding sources.

The Sources and Uses table is a summary of the amount of funding required to complete a M&A transaction.

The sources & uses section lists the total cost of acquiring the target in a hypothetical transaction structure.

The “Uses” side calculates the total amount of capital required to make the acquisition (i.e., the purchase price and transaction fees), whereas the “Sources” side details how exactly the deal is going to be funded, including the required amount of debt and equity financing.

Just like how the assets side must be equal to the liabilities & equity side on the balance sheet, the “sources” side (the total funding) must be equal to the “uses” side (the amount being spent).

The more complex Sources and Uses of Funds table looks like that.

Advisory fees

Fees to bankers, lawyers and accountants, paid in cash and expensed during the year immediately after the deal, calculated on the basis of acquisition EV

Debt issuance fees

Fees to debt underwriters, paid in cash, usually capitalized and then amortized over term of the debt using effective interest method

Equity issuance fees

Fees to equity underwriters. Kept by underwriters post share sale. Amount paid by new equity investors as part of share consideration

The proposed capital structure is among the most important return drivers in an M&A transaction, and the investor usually has the role of “plugging” (with equity) the remaining gap between the sources and uses for the transaction to proceed and close.