Definition
The sources and uses table shows the capital that will be required to close a transaction (uses) and how that capital will be secured (sources).
Typical components
Uses
The uses refer neither to the Equity Value, not the Enterprise Value of the target company. The reason for this difference is that the buyer also needs to account for the Transaction Costs, Underwriting Fees, Cash to Balance Sheet and other costs associated to the transaction. Due to these differences, the total uses will more closely approximate to the Enterprise Value in case that the buyer decides to refinance any existing debt. In case the buyer decides to rollover the existing debt, the uses will more closely approximate the Equity Value. Therefore the uses typically contains:
- Purchase Price Paid to Seller = Equity Value
- Refinanced Debt
- Existing Cash
- Transaction Costs
- Underwriting Fees
- Working Capital Adjustments
- Cash to Balance Sheet
Sources
The sources will typically be comprised of the different debt instruments & co-investments or rollovers secured by the buyer. The difference between these and the uses will be the sponsor equity ticket. With this mix, the buyer will aim to minimize the cost of capital for the business by finding the optimal capital structure the business can support. This will represent the new Capital Structure of the company, that will maximize the returns for the financial sponsor. Therefore the uses will typically contain:
- Various Debt Instruments
- Management Rollover
- Co-Investors
- Sponsor Equity