What is the purpose of the 'Sources & Uses' section in an LBO model?

What is the purpose of the 'Sources & Uses' section in an LBO model?

• A. It projects future cash flows
• B. It estimates regulatory hurdles
• C. It shows how financing is raised, what capital is used, and how much investor equity is required
• D. It analyzes tax effects

Answer: (C)

In an LBO model, the Sources & Uses section shows how the deal is funded and where the money goes. It lists the sources of funds—new debt tranches, equity from sponsors, any seller rollover, and refinancings—and the uses of funds—purchase price, financing fees, transaction costs, and any debt paydown or working capital adjustments. This layout makes clear exactly how much equity investors must put in and how the overall capitalization is structured, with the important check that total sources equal total uses. That direct focus on how financing is raised, what capital is needed, and where it’s deployed is why this section is the best fit. It’s not about projecting future cash flows, regulatory hurdles, or tax effects, which are analyzed in other parts of the model.

In an LBO model, the Sources & Uses section shows how the deal is funded and where the money goes. It lists the sources of funds—new debt tranches, equity from sponsors, any seller rollover, and refinancings—and the uses of funds—purchase price, financing fees, transaction costs, and any debt paydown or working capital adjustments. This layout makes clear exactly how much equity investors must put in and how the overall capitalization is structured, with the important check that total sources equal total uses. That direct focus on how financing is raised, what capital is needed, and where it’s deployed is why this section is the best fit. It’s not about projecting future cash flows, regulatory hurdles, or tax effects, which are analyzed in other parts of the model.