Before modeling a buyout, you list where every dollar comes from and where every dollar goes. That table is called Sources and Uses, and it is how you rebuild the real price. Enterprise value is the price of the shares plus the debt that must be refinanced, minus the cash acquired, which is $920 million, or 8.0 times EBITDA, in this example. Fees are a cost on top, so the all-in cost is $950 million.
Why it matters: The real cost of a deal is always higher than the headline price.
Summary: A Sources and Uses table shows where every dollar of a buyout comes from and where it goes, and it is where you rebuild the real price. Enterprise value is equity price plus debt refinanced minus cash acquired, $920 million or 8.0x EBITDA here; fees are a cost on top, making the all-in cost $950 million (8.26x).
- The rebuilt deal: $330 million floating Term Loan B, $220 million fixed notes, $400 million sponsor equity, $20 million target cash.
- Debt is sized on EBITDA: 4.78x, with 2.65x interest coverage at entry.
- A 6.00x maintenance covenant leaves a 29.9% EBITDA cushion in Year 1; covenant-lite loans passed 90% of US issuance in 2021.
- Treating total uses as the price can hide multiple expansion: $69.6 million in the chapter’s counterexample.
- Fees reduce returns but never belong in the entry multiple.
Every LBO model opens with a Sources & Uses table — a simple accounting of where the money to fund the deal comes from (Sources) and where every dollar of it goes (Uses). The two sides must balance exactly.
| Sources | $ million | Uses | $ million |
|---|---|---|---|
| Term Loan B (senior secured, floating: SOFR + 3.50%) | 330 | Purchase of target equity | 790 |
| Senior notes (unsecured, fixed 8.50%) | 220 | Refinance existing target debt | 150 |
| Sponsor equity | 400 | Transaction and financing fees | 30 |
| Cash on target’s balance sheet | 20 | ||
| Total sources | 970 | Total uses | 970 |
Sources and Uses balance by construction: every dollar raised must be accounted for on the Uses side. The table does not show the price as a single line, so you rebuild it. The target has LTM (last-twelve-month) EBITDA of $115 million and is bought at an entry multiple of 8.0x, echoing the comps and precedent multiples of Part 1: Corporate Finance & Valuation:
- Enterprise value (EV) = equity price + debt refinanced − cash acquired = 790 + 150 − 20 = $920 million = 8.0 × 115.
- Total uses = EV + fees + cash used as a source = 920 + 30 + 20 = $970 million. Fees are a cost of doing the deal, not part of the company’s value.
- All-in cost to the buyer = 920 + 30 = $950 million = 8.26x EBITDA. Quote the 8.0x as the price and the 8.26x as the hurdle the deal must clear.
The debt is sized on EBITDA, not on the price: $330 million of Term Loan B (2.87x) plus $220 million of notes (1.91x) = $550 million, or 4.78x. That is 57% of total sources, and 60% of the debt (330 ÷ 550) floats with SOFR, which was about 3.9% in early October 2026; the model assumes 4.0% flat, so the loan costs 7.50%. First-year cash interest = 330 × 7.50% + 220 × 8.50% = 24.75 + 18.70 = $43.45 million, and entry interest coverage = 115 ÷ 43.45 = 2.65x. Section 2.7: The LBO Model — Debt Paydown and Returns runs this deal forward.
A maintenance covenant must be met every quarter, for example total debt ÷ EBITDA no higher than 6.00x in Year 1, stepping down to 4.50x by Year 5. An incurrence covenant is tested only when the borrower does something, such as borrowing more or paying a dividend. Covenant-lite term loans carry only incurrence tests (often keeping a “springing” maintenance test on the revolving credit line), and they passed 90% of US leveraged loan issuance in 2021; private-credit loans more often keep maintenance tests.
Headroom is measured in EBITDA. At the end of Year 1 the example deal has $517.0 million of debt, so a 6.00x covenant is breached only if EBITDA falls below 517.0 ÷ 6.00 = $86.2 million, against $123 million forecast: a 29.9% cushion. The cushion is negotiated: wide enough that ordinary misses do not trip it, tight enough that a breach signals real deterioration while there is still value to protect. The roughly 30% cushion and the step-down schedule here are illustrative assumptions.
Before reading any LBO return, run three checks on the Sources and Uses. One: rebuild EV as equity price + debt refinanced − cash acquired, and confirm EV ÷ EBITDA equals the quoted entry multiple. Two: confirm fees sit outside EV, and compute the all-in multiple including them (8.26x here). Three: confirm the exit multiple is compared with the true entry multiple, so any difference is labeled as multiple expansion or contraction. If any check fails, fix the model before discussing returns.
Calling total uses “the price” and so hiding multiple expansion. Suppose the table had shown a $740 million equity purchase with the same $150 million refinancing, $20 million of cash and a $920 million total. True EV would be 740 + 150 − 20 = $870 million, or 7.57x, not 8.0x. An exit “at the same 8.0x” would then silently add (8.0 − 7.57) × 160 = $69.6 million of exit value from multiple expansion. In this model, with the hypothetical’s $350 million of sponsor equity (the same $550 million of debt and $20 million of cash fund the rest of the $920 million), exiting at the true 7.57x instead of 8.0x cuts the IRR from 23.2% to 21.4%. Investment committees reject deals for less.
What is a Sources and Uses table in an LBO?
It is the one-page funding plan of the deal: where every dollar comes from (each debt tranche, sponsor equity, the target’s own cash) and where it goes (buying the equity, refinancing old debt, paying fees). The two sides must total the same. It is also where you rebuild enterprise value and check that the quoted entry multiple is real.
Are transaction fees part of enterprise value?
No. Enterprise value is what the business is worth to all capital providers; fees are a cost of buying it. They are funded in Sources and Uses, so they reduce the sponsor’s return, but they never enter the EV ÷ EBITDA entry multiple. Including them inflates the apparent entry multiple and hides the true price.
What is a covenant-lite loan?
A covenant-lite loan has no financial test the borrower must pass every quarter; it restricts only actions such as new borrowing or dividends. Lenders lose their early warning and their chance to renegotiate before value erodes. Such loans passed 90% of US leveraged loan issuance in 2021.
How is the amount of debt in an LBO decided?
Lenders size it as a multiple of EBITDA, adjusted for how stable the cash flow is, and check that interest coverage stays comfortable, here 4.78x debt to EBITDA and 2.65x coverage. The sponsor then fills the gap with equity. Higher rates reduce how much debt the same EBITDA can carry.
The rebuilt Sources and Uses reconciles: enterprise value of $920 million (8.0x EBITDA) equals the $790 million equity price plus $150 million of debt refinanced minus $20 million of cash, with $30 million of fees on top. Debt is sized at 4.78x EBITDA, covenants give lenders early warning, and comparing exit with the true entry multiple exposes any hidden multiple expansion.
Four questions on this chapter. Decide on your answer first, then click “Reveal Answer.”
1. Sources and Uses show a $600 million equity purchase, $100 million of target debt refinanced, $10 million of target cash used and $25 million of fees. EBITDA is $100 million. What are the enterprise value and entry multiple?
- $700 million and 7.0x
- $690 million and 6.9x
- $715 million and 7.15x
- $725 million and 7.25x
Reveal Answer
Answer: B. EV = equity price + debt refinanced − cash acquired = 600 + 100 − 10 = $690 million, or 6.9x. Fees are a cost of the deal, not part of EV.
2. How should transaction fees be treated in an LBO’s entry multiple?
- Added to enterprise value before computing the multiple
- Deducted from exit equity but ignored at entry entirely
- Funded in Sources and Uses but kept out of EV
- Treated as debt and repaid through the annual cash sweep
Reveal Answer
Answer: C. Fees reduce the sponsor’s return because they must be funded, but they are not part of what the business is worth, so they stay out of EV ÷ EBITDA.
3. A borrower has $480 million of debt, a 6.0x maximum debt-to-EBITDA covenant and forecast EBITDA of $100 million. By how much can EBITDA fall before a breach?
- 33%
- 25%
- 17%
- 20%
Reveal Answer
Answer: D. The breach floor is 480 ÷ 6.0 = $80 million, so EBITDA can fall (100 − 80) ÷ 100 = 20%.
4. True entry EV is $870 million on $115 million of EBITDA, but the model exits at 8.0x Year-5 EBITDA of $160 million and calls it the same multiple. How much exit value is hidden multiple expansion?
- About $69.6 million
- About $50.0 million
- About $30.0 million
- About $80.0 million
Reveal Answer
Answer: A. True entry multiple = 870 ÷ 115 = 7.57x; hidden expansion = (8.0 − 7.57) × 160 ≈ $69.6 million.
- Federal Reserve Bank of New York: SOFR — Floating-rate base for the Term Loan B