In an LBO model the sources and uses table is a convenient way to track the sources and uses of cash required to close a transaction. Building a sources and uses table can appear to be a process that is without a proper sequence, but there is definitely an order that can be followed. To understand it, let’s first explore concise definitions of the two terms. Think of sources and uses as follows:

Sources: The sources of cash required to consummate the transaction. 
Uses: The cash used to satisfy all claimants of the target company so that ownership can be transferred (the purchase price), and to pay the fees associated with the transaction. 

It follows that total sources should always be equal to total uses. Under Uses we need to further define claimants and fees, because in both instances there will be two types.

Claimants will need to be divided between shareholders (equity holders) and creditors (debt holders). 
Fees will be divided between transaction fees and financing fees. 

With these definitions in mind, we can establish a sequence. Staring with the Uses side of the table:

1. Establish Purchase Price (EBITDA x EBITDA Multiple)
2. Sources and Uses: Estimate Debt Available to Finance the Acquisition and Financing Fees (Note: Use Term Sheets if Available.)
3. Uses: Identify Debt Balances of the Target Company to be Paid Off (Satisfy Debt Holders)
4. Uses: Estimate Transaction Expenses
5. Uses: Calculate Total Capital Required to Close (Sum of Purchase Price and Fees)
6. Uses: Calculate Seller Proceeds (Cash Required to Purchase Target Company Equity)
7. Sources: Set Total Sources Equal to Total Uses
8. Sources: Calculate Equity Required to Close (Total Sources – Debt Available)

In the lesson that follows I will explain how to use the information in the sources and uses table to populate the balance sheet adjustments framework, which updates the balance sheet for the transaction.