Sources and uses

Uses set out what the money is spent on: the equity purchase price, refinancing existing debt, transaction fees, and any cash left on the balance sheet. Sources set out where it comes from: each debt tranche, sponsor equity, rolled management equity, and cash on hand.

The two sides balance by definition, and the sponsor equity line is usually the plug: everything else is determined by price and by what lenders will provide, so the equity cheque is what is left.

It is the first thing built in an LBO because it determines the opening balance sheet and therefore everything downstream: interest expense, the debt schedule, and the equity value at exit.

Reading one tells you the deal's shape immediately. The ratio of debt to total sources is the leverage, and the size of the fee line, which can be several percent of enterprise value, is a real cash cost that many quick models forget.