Sources and Uses of Funds Explained (M&A and LBO)
Sources and uses of funds is the table that shows how a deal is financed and what it pays for. Learn the formula, line items, and a full worked example.
Updated Jul 2, 2026 / 9 min read
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Sources and uses of funds is the table that maps out exactly where the money for an acquisition comes from (sources: debt, equity, cash) and exactly what it pays for (uses: purchase price, fees, refinanced debt). It is the starting page of every LBO model and appears in most M&A models too, because it is the mechanical proof that a deal can actually close. The core rule is that total sources must equal total uses, dollar for dollar, since money in a transaction is neither created nor destroyed. Once you build the uses side (what you owe) you size the sources side (how you pay for it), and the sponsor's equity check or the acquirer's financing mix falls out as the balancing "plug." This lesson walks through the line items, the balancing logic, and a full worked example with real numbers.
TL;DR
- Sources and uses is a two-column table where total sources must equal total uses, per Wall Street Prep.
- Uses typically include the purchase price, existing debt refinancing, and transaction plus financing fees.
- Sources typically include senior debt, subordinated or mezzanine debt, management rollover, and sponsor equity.
- Advisory and professional fees run about 2% of enterprise value; financing fees run about 2% to 3.5% of total debt, per Wall Street Prep and IB Interview Questions.
- Sponsor equity is the plug: total uses minus every other source of funding.
What is a sources and uses table?
A sources and uses table is a summary of the total funding required to complete an M&A transaction, most often a leveraged buyout, and exactly where that funding comes from. Wall Street Prep defines it as a table summarizing the total amount of funding required to complete a deal such as an LBO. IB Interview Questions frames it the same way: the table maps out where the money comes from and where it goes at the moment the transaction closes. Every model, from a two-minute paper LBO to a full 100-tab buyout model, opens with this table because it forces the two sides of the deal, financing and spending, to reconcile before anything else gets built.
What is the sources and uses formula?
The formula is simple: total uses must equal total sources. Breaking Into Wall Street states it plainly: money must be conserved in a transaction like this, it cannot be created or destroyed. What an acquirer pays for (uses) must equal how it finances the purchase (sources). If the two sides don't balance, the deal doesn't close as modeled, full stop. This single equation is why the table is usually the first tab in an LBO model: everything else, from the debt schedule to the returns calculation, depends on the split between debt and equity that this table produces.
What line items belong in "uses"?
The uses side lists everything the deal has to pay for, and it typically has four components. Per Wall Street Prep's worked template:
- Purchase price (or equity purchase price): the entry multiple times the EBITDA metric, or the offer price times diluted shares outstanding, per IB Interview Questions.
- Existing debt refinancing: repaying the target's current debt so the new capital structure starts clean.
- Transaction fees: advisory and professional fees (investment bank, legal, accounting, due diligence), typically about 2% of enterprise value.
- Financing fees: the cost of arranging the new debt, typically about 2% to 3.5% of total debt raised.
Some models add a fifth line, cash to the balance sheet, to fund a minimum working-capital cushion at close.
What line items belong in "sources"?
The sources side lists every pool of capital funding the deal, and the mix directly determines how much cash the buyer or sponsor has to contribute. Breaking Into Wall Street's classification rule is the cleanest way to sort a line item: anything that decreases the required cash contribution goes on sources, anything that increases it goes on uses, and anything with no net cash impact appears on both sides. The typical sources line items are:
| Source | What it is | Typical size |
|---|---|---|
| Senior secured debt | Term loans, revolving credit | Often 3x to 4x EBITDA |
| Subordinated or mezzanine debt | Junior debt, higher rate, lower priority | Fills leverage above senior debt |
| Management rollover equity | Existing management reinvests instead of cashing out | Often 5% to 15% of total equity |
| Sponsor equity | The private equity firm's cash contribution | The balancing plug |
In a strategic M&A deal rather than a sponsor-led LBO, the sources side looks different: it is the acquirer's own cash on hand, new debt issuance, and new equity or stock issued to the seller, since there is no private equity sponsor writing the equity check.
How do you calculate the equity check?
The equity check, also called the sponsor equity or the plug, is total uses minus every other confirmed source of funding. Wall Street Prep's worked example makes this concrete. A target has 25 million dollars of LTM EBITDA and is bought at a 10.0x entry multiple, for a 250 million dollar purchase price.
| Uses | Amount | Sources | Amount |
|---|---|---|---|
| Purchase price | 250.0M | Senior debt (4.0x EBITDA) | 100.0M |
| Transaction fees (2% of TEV) | 5.0M | Subordinated debt (3.0x EBITDA) | 75.0M |
| Financing fees (3.5% of debt) | 6.1M | Management rollover (10% of equity) | 9.1M |
| Cash to balance sheet | 5.0M | Sponsor equity (plug) | 82.0M |
| Total uses | 266.1M | Total sources | 266.1M |
Work it top to bottom: total uses come to 266.1 million dollars. Debt covers 175 million dollars (100 million senior plus 75 million subordinated, a combined 7.0x EBITDA), and management rolls over 9.1 million dollars. That leaves 266.1 million dollars minus 184.1 million dollars, or 82 million dollars, as the sponsor's required equity check. That 82 million dollar figure becomes the denominator for the entire returns calculation, since IRR and MOIC are both measured against the cash the sponsor actually put in.
How do sources and uses determine ownership?
Post-close ownership percentages come directly from each party's share of total sources. Breaking Into Wall Street explains that once every contributor's cash is on the sources side, you divide each contribution by total sources to get that party's ownership stake. Using the example above, the sponsor contributed 82 million dollars of the 91.1 million dollars total equity (82 million sponsor plus 9.1 million management rollover), for about 90% ownership, while management holds the remaining 10%, which matches the 10% rollover assumption used to size the fee. This is also how a deal with a founder rollover or an outside co-investor gets its cap table: sum every equity contribution, divide each by the total.
How is sources and uses different in an LBO versus strategic M&A?
An LBO leans heavily on debt because a private equity sponsor is optimizing for equity returns, while a strategic acquirer leans more on cash and stock because it is optimizing for credit quality and flexibility. Per IB Interview Questions, LBOs often push total leverage to 5.0x to 7.0x EBITDA depending on market conditions and credit quality, while strategic acquirers typically keep debt below 3.0x EBITDA to protect an investment-grade rating. The uses side looks almost identical in both cases (purchase price, fees, refinancing), but the sources side diverges: an LBO's sources are almost entirely debt tranches plus one sponsor equity check, while a strategic buyer's sources mix its own balance-sheet cash, new debt, and sometimes stock issued directly to the seller. This is the same trade-off that drives whether a deal is accretive or dilutive: cheaper financing sources push EPS up, and debt is almost always cheaper than issuing new stock.
Frequently Asked Questions
Why do sources and uses have to balance exactly?
Because a transaction cannot spend money it does not have and cannot leave capital unaccounted for. Breaking Into Wall Street's framing is the clearest: money in a deal is conserved, it can't be created or destroyed, so every dollar of uses must be traceable to a specific dollar of sources. If the two sides don't tie out, the model has an error, not a real financing gap.
What is the "plug" in a sources and uses table?
The plug is whichever line item absorbs the remaining balance after every other source and use is filled in, almost always sponsor equity in an LBO. Wall Street Prep's worked example plugs sponsor equity at 82 million dollars, the exact amount left over after debt, fees, and management rollover are subtracted from total uses of 266.1 million dollars.
How big are transaction and financing fees?
Per Wall Street Prep and IB Interview Questions, advisory and professional fees (investment bank, legal, accounting, due diligence) typically run about 2% to 2.5% of enterprise value, and financing fees for arranging new debt typically run about 2% to 3.5% of the total debt raised. Both are uses, since they are cash the deal has to pay regardless of who is financing it.
Does sources and uses show up in a paper LBO?
Yes, in a compressed form. As covered in how to solve a paper LBO, a timed paper LBO skips fees and rollover and just splits entry enterprise value into debt (from a stated leverage ratio) and a sponsor equity check, which is the fast version of the same balancing logic used in a full model.
How does management rollover affect the equity check?
Management rollover reduces the sponsor's required cash contribution dollar for dollar, because it is still equity funding the deal, just from a different party. In the worked example, a 9.1 million dollar rollover (10% of total equity) means the sponsor only has to write an 82 million dollar check instead of the full 91.1 million dollars of equity the deal needs.
Where does goodwill fit relative to sources and uses?
Sources and uses determines how a deal is financed and how much is paid in total; goodwill is a purchase-accounting result that shows up afterward, once the purchase price is allocated across the target's identifiable assets. The two are connected only through the total purchase price line on the uses side, as explained in goodwill and purchase accounting.
Sources
- Wall Street Prep: Sources and Uses of Funds (checked July 2026)
- IB Interview Questions: Sources and Uses of Funds in an LBO (checked July 2026)
- Breaking Into Wall Street: LBO Model Sources and Uses (checked July 2026)
- IB Interview Questions: Sources and Uses of Funds in M&A Transactions Explained (checked July 2026)