LBO

Sources and uses

6 min read · updated July 2, 2026

Before you model a single year of an LBO, you build one small table. Sources and Uses. It answers two questions: what does this deal cost, and where does the cash come from to pay for it? Get this wrong and every number downstream is wrong too.

Here's the whole idea in one line. Uses is everything you spend. Sources is everything you fund it with. They must equal, because you can't spend a dollar you didn't raise. The sponsor's equity check is whatever's left over to make the two sides balance.

Uses on the left is what you pay for. Sources on the right is how you fund it. The equity check is the plug that forces them to tie.

The Uses side: what you actually pay for

New candidates think the "cost" of a deal is the purchase price. It's more than that. Uses has three pieces, and people forget two of them.

1. Buy the equity

You're buying a company, so you pay the owners for their equity value. If the target has $100 of EBITDA and you pay a 10x enterprise value multiple, that's a $1,000 enterprise value. But you don't cut a check for enterprise value. You pay for the equity, then deal with the debt separately. Say the target already carries $200 of net debt. The equity you're buying is worth $1,000 minus $200 = $800.

2. Refinance the existing debt

That old $200 of debt doesn't just vanish. In most buyouts the lenders get taken out at close and replaced with the sponsor's new financing. So you have to repay it. That's another $200 of Uses. Miss this line and your table won't balance, and worse, you'll understate how much money the deal actually needs.

3. Pay the fees

Deals aren't free. There are advisory fees to the bankers, financing fees and original issue discount to the lenders, legal and accounting costs. Round it to $50 for the example. Fees are real cash out the door on day one, and they're the single most forgotten line in a first-timer's table.

Add it up:

$\text{Uses} = \underbrace{800}_{\text{equity purchase}} + \underbrace{200}_{\text{refi debt}} + \underbrace{50}_{\text{fees}} = 1{,}050$

Common mistake

Two errors sink almost every beginner's Sources and Uses table. First, leaving out fees or the refinanced debt on the Uses side so the deal looks cheaper than it is. Second, and this is the big one, treating the sponsor's equity as a number you plug in from the start. It isn't an input. It's the output. You size every other line first, and equity is simply whatever's left to make the table balance. Type equity in as an assumption and you've broken the entire logic of the model.

The Sources side: where the money comes from

Now fund the $1,050. Sources stacks up from cheapest and safest debt at the top to the sponsor's equity at the bottom.

Lenders won't fund the whole thing. They cap how much debt the business can carry, usually as a multiple of EBITDA, because the company's cash flow has to service it. Say the debt markets give you 5.0x EBITDA. On $100 of EBITDA that's $500 of total debt, layered across a few tranches:

| Source | Amount | What it is | |---|---|---| | Revolver | $0 at close | A credit line, usually undrawn on day one | | Senior term loan | $350 | Cheapest, most secured, paid back first | | High-yield bonds | $150 | Riskier, higher rate, paid back later | | Sponsor equity | $550 | The plug | | Total sources | $1,050 | Ties to Uses |

The tranches sit in a capital structure by seniority. Senior debt is first in line if things go bad, so it's the cheapest. Mezzanine and high-yield sit below it, take more risk, and charge more. The sponsor's equity is dead last, which is exactly why it earns the most when the deal works.

Why equity is the plug

Here's the mechanism. You know Uses ($1,050). You know how much debt the market will give you ($500). Everything you can't borrow, you have to fund with your own money:

$\text{Equity} = \text{Uses} - \text{Debt raised} - \text{Target cash used}$

$\text{Equity} = 1{,}050 - 500 - 0 = 550$

Key insight

Sources and Uses always ties out, by construction. It's not a coincidence you check at the end. The equity check is defined as the amount that makes both sides equal, so balancing isn't the goal, it's the definition. When they don't match, you didn't make a modeling error in the plug. You forgot a line in Uses or mis-sized a debt tranche.

If the target is sitting on spare cash, you can use some of it to fund the deal (a "cash-to-balance-sheet" source). Pull in $50 of the target's cash and your debt and fees are unchanged, so the equity check drops to $500. Less of your own money in, same business out. That's the whole game.

Why the size of the plug is the point

The equity check isn't just a balancing figure. It's the denominator of your return. Put in $550 and exit the equity at $1,375, and that's a 2.5x MOIC. Fund the exact same deal with more debt so your check is only $450, and the same exit equity is a higher multiple on a smaller base. That's the tie between this table and the returns math in a paper LBO: more debt shrinks the plug, and a smaller plug magnifies the return (in both directions).

So Sources and Uses isn't busywork before the "real" model. It sets the equity check, and the equity check is the deal.

A clean 30-second version

Enterprise value: $1,000 (10x on $100 EBITDA).
Uses: $800 equity purchase + $200 refinance old debt + $50 fees = $1,050.
Sources: $500 new debt + $550 sponsor equity = $1,050.
Both sides tie. The $550 equity is the plug.

If you want the accounting side of what happens after close (asset write-ups, goodwill, deferred taxes), that lives with accretion/dilution and purchase accounting. Sources and Uses just gets the money in the door.

Interview tip

When an interviewer says "set up the deal," they want to hear this sequence out loud in under a minute, in order: enterprise value, then Uses (buy the equity, refinance existing debt, pay fees), then Sources (size the debt off an EBITDA multiple), then back into the equity check as the plug. The tell that separates a strong candidate is naming the refi and the fees without being prompted, and calling the equity a plug rather than an assumption. Say those two things and the interviewer knows you've actually built one.

Glossary

New to the lingo? Every term used above, in plain English.

LBO (Leveraged Buyout): Buying a company using mostly borrowed money, then using the company’s own cash flow to pay that debt down over time. The classic private equity playbook.
Sponsor: A private equity firm. In an LBO the sponsor is the buyer that puts up the equity and controls the company.
Private equity (PE): Firms that raise money to buy whole companies, improve them over several years, and sell them for a profit. They often use large amounts of borrowed money to do it.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A rough proxy for a company’s operating cash profit, before financing and accounting choices.
EV (Enterprise Value): The value of a company’s whole operations, to every investor including lenders and shareholders. It does not depend on how the company is financed.
Equity Value: The slice of a company that belongs to its shareholders. For a public company this is the market capitalization (share price times shares outstanding).
Net debt: A company total debt minus its cash. It is what you subtract from enterprise value to get to equity value, since a buyer could use the cash to pay down the debt.
Revolver (revolving credit facility): A flexible line of credit a company can draw on and repay as needed, like a corporate credit card. In a model it plugs any short-term cash shortfall.
Senior debt: The safest, cheapest layer of borrowing, first in line to be repaid and usually secured by assets. It sits at the top of the capital structure.
High-yield bond: A bond from a company with a lower credit rating (below investment grade). It pays more interest to compensate lenders for the higher risk of default.
Mezzanine debt: A riskier, more expensive layer of debt that sits below senior debt and above equity. It gets repaid later, so it demands a higher return.
Capital structure: The mix of debt and equity a company uses to fund itself. More debt is cheaper but riskier, and finding the right balance affects both value and risk.
MOIC (Multiple on Invested Capital): How many times an investor got their money back, calculated as cash returned divided by cash invested. A 2.5x MOIC means getting back 2.5 dollars for every dollar put in. It ignores time.

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