Every LBO model starts with the sources & uses table. And every junior associate gets it wrong in roughly the same way.
This post walks through what a real S&U looks like, with concrete numbers from a $500M EV deal, and three errors that will get you sent back to your desk — including the one that contributed to one of the largest PE failures in history.
What a sources & uses table is actually for
The S&U answers two questions in one rectangle:
- Where does the cash to close come from? (the "sources")
- Where does it go? (the "uses")
Both sides must total to the same number. If they don't, you have a circular reference or a transaction cost you forgot.
A worked example — $500M EV buyout
Setup: PE firm acquires a software company at 10× EBITDA on $50M of LTM EBITDA. Enterprise value = $500M. Target capital structure: 5× leverage. Sellers roll $50M of equity.
Sources
| Source | Amount | Notes |
|---|---|---|
| Bank debt (Term Loan B) | $200M | 4× EBITDA at SOFR + 450 |
| Subordinated notes | $50M | 1× EBITDA at 9% fixed |
| Sponsor equity (cash) | $200M | from the PE fund |
| Management rollover | $50M | sellers reinvest equity |
| Total sources | $500M |
Uses
| Use | Amount | Notes |
|---|---|---|
| Equity purchase price | $480M | what sellers receive in cash |
| Refinance existing debt | $10M | seller's old facility |
| Transaction expenses | $5M | legal, banking, diligence |
| Financing fees | $3M | capitalized, amortized |
| Minimum cash on B/S | $2M | working capital buffer |
| Total uses | $500M |
Both sides tie. Now the three errors.
Error 1: Mixing up EV and equity purchase price
Junior associates routinely put $500M on the uses side as "purchase price". That's wrong if the target has cash and/or existing debt at close.
EV is what you're paying for the business. Equity purchase price is what the sellers actually pocket. The bridge is:
EV = Equity Purchase Price + Existing Debt − Cash
In our example, the seller has $30M of existing debt and $20M of cash. So:
- Equity purchase price to seller = $500M − $30M + $20M = $490M
- Refinance the $30M debt and pay $20M of it from the seller's own cash → net cash outflow on uses = $490M + $30M − $20M = $500M ✓
If you confuse the two, your sources will short by exactly net debt. Senior associates will assume you don't understand the difference between equity and enterprise — and that's a reputation that's hard to undo on your first deal.
Error 2: Capitalizing transaction expenses
Transaction expenses (legal, advisory, diligence) are an immediate cash use at close. They are NOT financing fees, and they are NOT capitalized.
- Transaction expenses → expense at close, hit equity directly
- Financing fees → capitalized on B/S, amortized over the loan tenor
A common mistake: lumping everything into "fees" and capitalizing it all. This understates the cash needed at close AND overstates carrying value going forward.
In our $500M deal:
- $5M legal/banking/diligence → cash use at close, no balance sheet impact going forward
- $3M financing fees → carry as "deferred financing costs" on the asset side of the balance sheet, amortize over the 7-year TLB life (~$430K/year non-cash amortization expense)
If you mix these up, your sources will be $5M short (financing fees aren't a source — they're capitalized FROM the debt proceeds) and your interest expense will be wrong on day one.
Error 3: Treating management rollover as cash
Management rollover is equity that existing owners reinvest into the NewCo. It's a SOURCE — but it's not cash hitting the table.
- Cash sponsor equity: $200M of new money from the PE fund
- Management rollover: $50M of existing seller equity that converts into NewCo common stock
Total equity is $250M. But the cash going into the deal is only $200M from the fund (plus the $250M of debt). The seller is taking $50M less in cash from the deal and getting $50M of NewCo equity instead.
Why this matters: when you model returns, the rollover equity has the same exit upside as sponsor equity. If you model it as cash on the sources side, you'll understate the sponsor's effective ownership and overstate the MOIC.
Case study: Toys "R" Us — when capital structure kills the company
The error PE associates make most often — over-leverage — was the same error that killed Toys "R" Us.
In 2005, KKR + Bain Capital + Vornado bought Toys "R" Us for a $6.6B enterprise value at 12× EBITDA, financed with 5.7× leverage ($5.3B of debt). That left Toys with $400M/year in interest expense against $550M of EBITDA.
Look at what that capital structure does in practice:
| Year 0 | A bad year | |
|---|---|---|
| EBITDA | $550M | $400M |
| Cash interest | $400M | $400M |
| EBITDA − Interest | $150M | $0M |
| Free cash flow for reinvestment | ~$100M | $0M |
The deal was constructed for a world where EBITDA grew. The problem: Amazon launched its toy warehouse two years before the buyout. Sponsors didn't take e-commerce disruption seriously in their model.
When EBITDA started dropping, there was no cash left to invest in an e-commerce transformation. The capital structure left zero margin for error. Toys filed for Chapter 11 in September 2017 and liquidated in 2018 — a complete equity wipeout for fund LPs.
The Toys case isn't an Error 1 / 2 / 3 — those are mechanical mistakes a senior will catch. It's the worse error: the S&U was internally consistent but the capital structure was wrong for the underlying business. When you size leverage on an LBO, you're not optimizing for max debt at close — you're sizing for the EBITDA you'll actually have in years 2–5.
The Toys R Us bankruptcy filings cite the $5.3B debt load explicitly as the reason they couldn't compete with Amazon. The deal didn't fail because the sponsors built a bad S&U. It failed because the S&U was too tight for the world they were operating in.
The clean S&U test
Three questions to sanity-check your S&U before sending it up:
- Does total sources = total uses? (If not, something's missing or double-counted.)
- Does the equity purchase price = EV minus net debt? (Net debt = existing debt minus cash.)
- Are financing fees on the asset side of the balance sheet, not the income statement? (Capitalized, amortized over the loan tenor.)
Yes to all three = internally consistent S&U.
A fourth question your IC will ask: Does the EBITDA / interest coverage ratio give you margin for error in a downturn? Sponsors who answered that question honestly in 2005 don't end up running Toys "R" Us into the ground in 2018.
What this looks like in a real model
Our All-in-One PE Model has the S&U as a configurable input on the LBO tab. Seven tranche types (Bank Debt, Sr. Sub, Discount Notes, PIK Preferred, Outside Equity, Rollover, Earnout), with the EV-to-equity bridge automated and financing fee amortization baked into the debt schedule. The model also runs sensitivity tables that show what happens to your equity if EBITDA misses by 10–30% — exactly the test the Toys "R" Us sponsors should have stressed.
See the LBO sheet preview before buying.
Get the S&U right and everything downstream — interest, taxes, equity returns — falls into place. Get it wrong and every line item in the model is off by tens of millions.
Sources:
- Toys "R" Us Chapter 11 Petition (S.D. NY 2017), Prime Clerk docket — original capital structure detail
- House Financial Services Committee Hearing (Feb 2019), "The Toys R Us Bankruptcy and the Aftermath" — interest expense and EBITDA figures
- Bloomberg, "How Vulture Capitalists Ate Toys R Us," March 2018 — deal close details and sponsor fee history