Walk me through the sources and uses in an LBO.
Uses are what the deal pays for, the equity purchase price, refinanced debt and fees, say $700 million, $300 million and $30 million, or $1,030 million. Sources are how it is funded, new debt, rolled equity and sponsor equity, which is the plug.
See this answer go from 50 to 90
Example answer
50/100
Sources and uses is the table that shows how much money the deal needs and where it comes from. Uses are everything that has to be paid at closing, sources are who pays for it, and the two sides must be equal. The main use is the purchase price. Then sources. The lenders decide how much debt the company can carry. The rest is equity from the sponsor, so the sponsor's equity is the plug. That's basically how the table works.
What holds it back
The idea is right: two sides that match, with sponsor equity as the plug. But the only use named is the purchase price, so refinanced debt and fees are missing, and there are no numbers.
Sources and uses is the table that shows how much money the deal needs and where it comes from. Uses are everything that has to be paid at closing, sources are who pays for it, and the two sides must be equal. I start with uses, because the price sets them. There are three main ones: buying the seller's equity, refinancing the company's existing debt, and fees. Say the company has $100 million of EBITDA and the sponsor pays 10 times, so an enterprise value of $1,000 million. With $300 million of existing debt and no spare cash, the equity costs $700 million and the $300 million gets repaid. Add $30 million of fees, and total uses are $1,030 million. Then sources. The lenders decide how much debt the company can carry. Say a term loan of 4 times EBITDA, $400 million, and senior notes of 2 times, $200 million. Management rolls over $50 million of its shares into the new company. That's $650 million, so the sponsor's equity is the plug: $1,030 million minus $650 million is $380 million. As a check, sources are 400 plus 200 plus 50 plus 380, which is $1,030 million, the same as uses.
Sources and uses is the table that shows how much money the deal needs and where it comes from. Uses are everything that has to be paid at closing, sources are who pays for it, and the two sides must be equal. I start with uses, because the price sets them. There are three main ones: buying the seller's equity, refinancing the company's existing debt, and fees. Say the company has $100 million of EBITDA and the sponsor pays 10 times, so an enterprise value of $1,000 million. With $300 million of existing debt and no spare cash, the equity costs $700 million and the $300 million gets repaid, because existing loans usually come due when the company changes owner. Add $30 million of fees for the advisers and the new financing, and total uses are $1,030 million. Then sources. The lenders decide how much debt the company can carry. Say a term loan of 4 times EBITDA, $400 million, and senior notes of 2 times, $200 million. Management rolls over $50 million of its shares into the new company, which is equity the sponsor doesn't have to fund. That's $650 million, so the sponsor's equity is the plug: $1,030 million minus $650 million is $380 million. As a check, sources are 400 plus 200 plus 50 plus 380, which is $1,030 million, the same as uses. The sponsor is funding about 37% of the deal, and leverage is 6 times EBITDA. The number I care about is the $380 million, because it's what every return gets measured against later. Two details I'd raise if asked. Spare cash on the target's balance sheet can be a source, which lowers the equity needed. And fees are real money, so a model that leaves them out overstates the return.
The numbers, step by step
A company with $100 million of EBITDA bought at 10 times, with $300 million of existing debt and no spare cash. All figures in $ millions.
- Enterprise value$100 × 10
- $1,000 million
- Purchase of the seller's equity$1,000 − $300 of existing debt
- $700 million
- Total uses$700 equity + $300 debt repaid + $30 fees
- $1,030 million
- Term loan$100 × 4
- $400 million
- Senior notes$100 × 2
- $200 million
- Sponsor equity (the plug)$1,030 − $400 − $200 − $50 rollover
- $380 million
- Total sources$400 + $200 + $50 + $380
- $1,030 million
- Sponsor's share of the funding$380 / $1,030
- about 37%
- Leverage: total debt to EBITDA($400 + $200) / $100
- 6.0x
What the interviewer listens for
- Do you start with uses, since the price sets them?
- Do you include refinanced debt and fees, not only the purchase price?
- Do you treat sponsor equity as the plug?
- Do both sides add up to the same number?
- Do you know why this table matters for returns?
Common mistakes
- Putting only the purchase price in uses.The existing debt has to be repaid and the fees have to be paid, and both need funding.
- Counting the enterprise value and the refinanced debt on top of each other.Enterprise value already includes the debt, so the uses are the equity purchase, the debt repaid and fees.
- Choosing the sponsor's equity first.Debt is sized by what lenders will give, and equity is whatever is left to fill.
- Never checking that the two sides match.Adding up sources at the end takes five seconds and shows the table is right.
More finance technicals
- What is a dividend recapitalization, and why would a private equity firm do one?
- What kinds of debt are used in an LBO?
- How do you decide how much debt a company can support?
- Walk me through a basic LBO.
- What makes a company a good LBO candidate?
LBO interview questionsAll interview questionsFree technical questionsPaper LBO practice
Ready for an interviewer that talks back?
Start the 7-day free trial and run your first full case with the AI interviewer today.
Start 7-day free trial