A sources and uses table lists everything an acquisition needs at closing, the uses, and everything that pays for them, the sources. The two columns must be equal. Uses include the purchase price, the target's debt being paid off, transaction costs, financing fees and cash for the balance sheet. Sources include senior debt, any revolver drawn at closing, subordinated or mezzanine debt, a seller note, rollover equity and the buyer's or sponsor's equity. Lenders read it first because it shows the whole deal on one page, and a missing line, usually costs or working capital, is what forces a late restructure.
- The rule
- Total sources equal total uses, exactly
- What sizes the senior debt
- Leverage on EBITDA, not the price; commonly 2x to 3.5x from senior cash-flow lenders
- Uses most often left out
- Transaction costs, financing fees and cash for working capital
- Where a forgotten use lands
- On the equity, because the debt is already sized
- Who builds it
- The buyer or its advisor, before the letter of intent is signed
One page, two columns, one total
A sources and uses table is the financing plan of an acquisition written as arithmetic. One column, uses, is everything the transaction has to pay for on the day it closes. The other, sources, is where each of those amounts comes from. They must balance exactly, because on the closing date the funds flow disburses the uses from the sources and there is nowhere else for money to come from.
Lenders turn to it before the model and before the memo because it answers the questions that decide their appetite quickly: how much debt, how much of it is theirs, how much real equity sits beneath it, whether the seller is financing or rolling part of the price and on what terms, and whether anything is being funded that they will not fund. A credit officer who finds the table incomplete assumes the rest of the file is too. It is the first page of every lender package Midas Partners builds, and the glossary entry has the short definition.
The uses: everything that has to be paid at closing
- Purchase price. Usually agreed as an enterprise value on a cash-free, debt-free basis, then adjusted at closing for the target's debt, cash and working capital against the peg. Splitting the price into what is paid to the seller and what goes to creditors makes the table clearer.
- Debt being paid off. The target's term loans, revolver, equipment financing and any liens that must be released at closing. Paying off the target's debt at closing explains how these are handled.
- Transaction costs. Legal fees on the purchase and the financing, the quality of earnings, tax and other diligence, and insurance such as a representations and warranties policy where one is bought.
- Financing fees. The lenders' upfront fees and their counsel's costs. These are often netted from loan proceeds at funding, so the table must show the loan at its full amount and the fees as a use.
- Cash to the balance sheet. In a cash-free deal the seller takes the cash, so the buyer puts back what the business needs to run on the first day, or arranges a revolver draw. Working capital at close covers how much.
- Escrows and reserves. An indemnity escrow is usually funded out of the price rather than on top of it. A reserve a lender requires, where there is one, is a separate use.
The sources: who pays for it
- Senior term loan. From a bank or private credit fund, sized on EBITDA. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA; a unitranche can stretch further in one loan.
- Revolver drawn at closing. Funds working capital rather than purchase price. An asset-based revolver sizes it from the borrowing base; asset-based lenders typically advance 80% to 90% of eligible receivables. Using a revolver in an acquisition covers the mechanics.
- Mezzanine or second lien. A subordinated layer behind the senior loan when senior debt does not reach far enough. See mezzanine debt.
- Seller note. Part of the price, paid to the seller over time and subordinated to the senior lenders. Its cash payments count in coverage. See seller note subordination terms.
- Rollover equity. The seller keeps a stake instead of taking all of the price in cash. It appears as a source with no cash attached. Rollover equity covers how lenders read it.
- Buyer or sponsor equity. Cash from the buyer, a fund, an independent sponsor's investors or co-investors. Lenders want to see that it is committed and where it comes from.
An acquisition, worked through
In plain numbers, here is a complete table for a company with adjusted EBITDA of 2,000, bought for an enterprise value of 10,000:
| Uses | Amount | Sources | Amount |
|---|---|---|---|
| Equity purchase price to the seller | 8,800 | Senior term loan | 6,000 |
| Repayment of the target's existing debt | 1,200 | Revolver drawn at closing | 200 |
| Transaction costs and financing fees | 400 | Subordinated seller note | 1,000 |
| Cash to the balance sheet | 200 | Seller rollover equity | 1,000 |
| Buyer and investor equity | 2,400 | ||
| Total uses | 10,600 | Total sources | 10,600 |
Read it the way a lender does. The senior loan was fixed first, by leverage: three times EBITDA. The revolver draw matches the cash put on the balance sheet, so it funds working capital, not price. The seller note and rollover together cover a fifth of the price, and the seller note is subordinated. Beneath the senior loan sit 3,400 of equity counting the rollover, which is the cushion the lender is lending against. Transaction costs are paid with equity rather than borrowed.
Behind the table sit two more tests. Total debt, including the revolver draw and the seller note, is 7,200 against EBITDA of 2,000; the lenders will want to see that the whole stack can be carried, not only their piece. And the cash payments on all of it have to be covered: conventional bank lenders commonly look for debt service coverage of at least 1.25x. How much debt a business can carry walks through both.
The line that goes missing
Now suppose the buyer built the first version from the letter of intent alone. Uses were the price, 10,000. Sources were the senior loan of 6,000, the seller note and rollover of 2,000, and 2,000 of equity. It balanced.
Then the lenders and the quality of earnings added what was missing: 400 of transaction costs and financing fees, and 200 of cash the business needs on the first day. The senior loan could not grow, because it was already sized on leverage. The revolver could fund the 200 of working capital if the borrowing base supported it. The 400 of costs had nowhere to go but the equity, which rose from 2,000 to 2,400, a fifth more than the buyer or the investors had planned to write.
In a leverage-sized deal, every use left out of the first table lands on the equity.
Worse cases follow the same pattern. A quality of earnings that trims EBITDA shrinks the senior loan while the price stays put. A working capital shortfall at closing has to be funded on the day. Debt-like items the seller did not list, such as customer deposits or deferred revenue, should reduce the price in a cash-free, debt-free deal, but only if the purchase agreement says so. Each of these is easier to settle in the letter of intent than after it, when the financing contingency is running.
Which uses lenders will finance
| Use | Senior cash-flow term loan | Revolver or ABL | Usually funded by |
|---|---|---|---|
| Goodwill and enterprise value | Yes, within its leverage limit | No | Term debt, subordinated debt, seller paper and equity |
| Real estate bought with the company | Sometimes, often better financed separately | No | A separate real estate loan, or a sale-leaseback |
| Payoff of the target's debt | Yes, as part of the price | Partly, where the old debt was a revolver | The new facilities |
| Working capital and cash to the balance sheet | Rarely | Yes, against the borrowing base | The revolver |
| Transaction costs | Rarely | No | Equity |
| Financing fees | Often netted from proceeds | Sometimes | The loan proceeds or equity |
Midas Partners's financing model starts from this table and carries every line through to leverage and coverage, so a change to costs, working capital or the seller's terms shows up in the ratios immediately. Software does the analyst work and a senior banker checks every page before the client approves it. Once the documents are in, the full package is built in a day.
Common questions
- Why is the senior loan not a percentage of the price?
- Because cash-flow lenders size on EBITDA, not on what the buyer agreed to pay. A higher price does not bring more senior debt; it brings a larger gap for equity, seller paper or subordinated debt to fill.
- Should transaction costs be borrowed?
- Lenders rarely fund them with the term loan, so they are usually paid with equity. Financing fees are the exception: they are often netted from the loan proceeds, which still makes them a use in the table.
- Does a seller note count as equity?
- No. It is subordinated debt: it lowers the cash the buyer brings, but lenders count it in total leverage and its cash payments in coverage. A rollover, by contrast, is equity if the seller cannot take it out early.
- Where does an indemnity escrow go in the table?
- Inside the purchase price. The price is funded in full at closing, and part of it is paid to an escrow agent instead of the seller. Escrows and holdbacks covers how lenders treat it.
- When should the table be built?
- Before the letter of intent is signed, from a first estimate of every line. It will be refined in diligence, but a price agreed without it is a price agreed without knowing how it will be paid.