What Does Sources and Uses Mean?
A sources and uses analysis provides a summary of where the capital used to fund an acquisition will come from (the sources), what this capital will purchase (the uses). The sources and the uses must equal each other, and they must total the total purchase price plus transaction costs.
Typical sources of capital include:
- Bank debt;
- Vendor financing (VTB or earnout);
- Mezzanine debt;
- Earnouts; and/or
Typical uses of capital include:
- Capital assets;
- Working capital;
- Goodwill; and/or
- Transaction costs.
Divestopedia Explains Sources and Uses
Computing the sources and uses in a deal is an important exercise to provide a high level overview of a transaction. When preparing this schedule, some people get confused on which amounts go where. To determine the sources, answer the question, "Where is the capital coming from?" To determine the uses, answer the question, "What is the capital being used for?" Although it sounds simple, there are cases, like in the example below, where it is not that clear.
Prospective buyers sometimes prefer not to disclose the amount of debt they are using on a deal (the source) because they think this level of debt may scare off the seller. In the sources of capital, rather than listing out all of the debt, these buyers will just classify the amount as "cash to vendor." Cash to vendor is a form of consideration, not a source of capital. You need to ask "Where is the cash coming from?"
If you were selling 100% of your business for cash, the cash to vendor disclosure would be sufficient because the capital structure of the business is irrelevant to you post-transaction. However, if you had only sold a portion of your business or had some other consideration, such as a seller note or an earnout, then you would be interested to know how much debt the business is carrying post-transaction. A simple summary of sources and uses can help you determine the amount of leverage that is being put on a deal and exactly what the capital will be used for.