Sources and Uses
A two-column financial table showing where the money to fund an acquisition comes from (Sources: debt, equity, seller note) and exactly where it goes (Uses: purchase price, transaction fees, working capital reserve, closing costs).
Full Definition
The Sources and Uses table is the fundamental financial summary of how an acquisition is funded and how those funds are deployed. Every serious offer or term sheet in M&A — from a $1M small business purchase to a $500M leveraged buyout — is built around a Sources and Uses schedule that must balance: total Sources must equal total Uses to the dollar.
Sources represent all the capital flowing into the transaction. In a typical SMB acquisition, Sources include: senior debt (SBA 7(a) loan, conventional bank term loan, or private credit), subordinated or mezzanine debt, seller notes (the portion the seller is lending back to the buyer), rollover equity (the seller's retained stake reinvested into the new entity), and buyer equity (cash the buyer or investor brings to the table). Each source is listed with its dollar amount and percentage of the total capital structure.
Uses represent every dollar committed at closing. The largest Use is almost always the purchase price paid to the seller — the enterprise value agreed in the LOI minus any adjustments. Other Uses include: transaction fees (legal, accounting, investment banking, lender origination fees), quality of earnings report costs, closing costs, escrow deposits, debt issuance costs, and — critically — the funded working capital reserve. Many buyers forget to include an initial working capital injection as a Use, then discover at close that the business needs capital to fund operations before it generates its first cash flow under new ownership.
The Sources and Uses is more than an accounting exercise — it is the clearest picture of the deal's capital structure risk. A Sources and Uses with 85% debt and 15% equity signals an aggressively leveraged deal with minimal cushion. One with 50% equity signals a conservative structure. Lenders, co-investors, and advisors review this table to immediately assess whether the deal is fundable and prudently structured. A well-balanced Sources and Uses with explicit line items for fees and working capital signals a sophisticated, prepared buyer.
Seller vs. Buyer Perspective
The Sources and Uses tells you, as the seller, exactly where your payment is coming from and in what form. If the buyer's Sources table shows a $2M seller note, a $1M earnout, and only $4M in cash at close on a $7M deal, you are effectively financing nearly half the transaction yourself through deferred consideration. Review the Sources and Uses critically — distinguish the cash you receive at close from deferred obligations that depend on the buyer's future performance.
Also look at the buyer's equity contribution. A buyer putting in only 5–10% equity against 90%+ debt has very little skin in the game. If the business hits a rough patch, that buyer may walk away from the investment before protecting your seller note or earnout. A meaningful equity cushion (20–30%+) signals the buyer has real money at risk alongside you.
Build your Sources and Uses before you finalize your offer price — not after. The table forces discipline: every dollar of purchase price must have a corresponding funding source, and every cost of the transaction must be explicitly planned. Buyers who build the purchase price first and figure out funding second often discover they cannot close or must scramble for bridge capital at the last minute.
When sizing your equity contribution, leave a buffer above the lender's minimum requirement. A lender who requires 10% equity as a floor should receive 15–20% from a prudent buyer — the extra cushion reduces default risk and often improves your loan pricing. Also include a realistic working capital reserve in Uses; undercapitalizing the business at close creates an immediate cash crisis that undermines your ability to service debt and operate.
Real-World Example
A buyer acquired a $3M EBITDA industrial cleaning company for $15M (5× EBITDA). The Sources and Uses table:
SOURCES: SBA 7(a) term loan $9.5M (63%) | Seller note $1.5M (10%) | Buyer equity $4M (27%) = $15M total.
USES: Purchase price to seller $13.2M | Transaction fees (legal, QofE, lender) $450K | Escrow holdback $750K | Working capital reserve $600K = $15M total.
The escrow holdback came from the seller's proceeds and was reflected as a Use separate from the cash-at-close payment. The working capital reserve ensured the buyer did not drain the operating account immediately post-close.
Why It Matters & Common Pitfalls
- !Forgetting transaction costs as a Use. Legal fees, investment banking fees, lender origination fees, QofE costs, and title/closing costs can easily total $300K–$800K on a $10M deal. Buyers who exclude these from the Uses column are underfunding the transaction and will have to scramble to cover them at close.
- !No working capital reserve. A business needs operating capital to run from day one of new ownership — payroll, vendor payments, and overhead don't wait for receivables to collect. Including a funded working capital reserve in Uses is essential, especially in businesses with 30–60 day collection cycles.
- !Overstating seller note as committed. Seller notes appear in Sources, but they are negotiated instruments — if the seller changes their mind or the LOI terms shift, the seller note may shrink or disappear. Do not finalize your equity sizing until the seller note is confirmed in the definitive agreement.
- !Imbalanced table. If your Sources total doesn't equal your Uses total, something is wrong in the model. This is the most basic sanity check — an unbalanced Sources and Uses means your deal structure has a hole. Fix it before presenting to lenders or co-investors.
Frequently Asked Questions
What's the difference between Sources and Uses and a cap table?↓
Do lenders always require a Sources and Uses?↓
What is a typical equity contribution percentage in an SMB acquisition?↓
Related Terms
Debt Assumption
Debt Assumption is a deal mechanics term governing the financial and legal specifics of how purchase consideration is structured or adjusted in M&A.
Secured Debt
Secured Debt is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.
Seller Note
A promissory note issued by the buyer to the seller for deferred payment of part of the purchase price — the specific instrument through which seller financing is delivered.
Closing Conditions
Closing conditions are requirements that must be met before a deal can close — regulatory approvals, rep accuracy, no material adverse change. Failure to satisfy can delay or kill deals.
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Disclaimer: The information provided on this page is for educational and informational purposes only. It should not be considered financial, legal, or investment advice. Business valuations depend on many factors specific to each situation. Always consult with qualified professionals — including business brokers, CPAs, and M&A attorneys — before making acquisition or sale decisions. LegacyVector is not a licensed broker, financial advisor, or attorney. Data shown may be based on limited samples and may not reflect current market conditions.
LegacyVector Research Team
Reviewed by M&A professionals · Updated April 2026