After the buyer determines how much to pay for the company (the target) and breaks down that price into its components, such as the acquired company’s assets and goodwill (a process known as purchase price allocation), the next step in the merger model is to build the Sources and Uses schedule.

This schedule explains how much funding is needed to complete the transaction and how that funding will be provided. The Uses of Funds outlines what the buyer needs to pay for, including the purchase of equity, debt repayment, and fees. The Sources of Funds shows where the money will come from, such as cash, new debt, or equity financing.

The Sources and Uses schedule ensures that all required funding is accounted for and sets the foundation for adjusting the buyer’s balance sheet at closing.

Steps to Build the Sources & Uses:

Step 1: Fill in Uses of Funds

Begin by entering all the required outflows for the transaction. This shows how much funding is needed to complete the deal. Common uses include the purchase of equity, debt repayment, and transaction fees.

Step 2: Link Total Sources to Total Uses

Make sure the Total Sources matches the Total Uses. This confirms that the funding is sufficient and the schedule is balanced.

Step 3: Complete Sources of Funds

Add the Sources of Funds. One of these is typically used as a plug so the total matches the required funding.

Uses of Funds:

Purchase of Target Equity:

• Total amount needed to acquire the target’s shares or assets
• Often the largest use of funds in the transaction
• Should account for dilutive securities, including options and convertible instruments

Refinancing of Target Debt:

• The buyer may be required or may choose to retire some or all of the target’s existing debt
• Existing debt often includes change of control clauses and may carry early retirement premiums
• Typically links to a detailed schedule listing each debt instrument with yes or no refinancing options

Debt Financing Fees:

• Typically calculated as a percentage of the amount raised for each new debt instrument
• Should include any commitment fees on undrawn facilities, such as a revolver

Transaction Fees:

• Includes advisory, due diligence, legal, and other non-debt financing fees
• Financial advisor fees are typically calculated as a percentage of the deal’s Enterprise Value

Other Items:

• Some rollover items appear in both Sources and Uses, such as management rollover equity, target debt retained, or seller takeback notes
• Other common items include cash added to the balance sheet or dividends paid to existing shareholders

Sources of Funds:

Cash on Hand:

• The buyer can use excess cash from its own balance sheet or from the target’s balance sheet
• Must account for any minimum cash balance required at closing
• In practice, using the target’s cash may require a bridge loan, but many models simplify by showing only the final result

New Debt:

• Can be shown as a single line or itemized by each new debt instrument
• Often determined using a percentage of the required funding (excluding cash on hand) or a target Debt/EBITDA ratio

New Equity:

• This is often the plug in the Sources and Uses schedule
• May represent new shares issued by the buyer in exchange for target shares or a new equity raise to fund the transaction