Sources and Uses for non-CFDF deal

I’ve mostly got this down between cash-free debt-free and traditional equity purchase. I ran into a problem though when thinking about the equity purchase (non-cfdf) example for a target that has a large amount of debt and cash (potentially from recently raising debt without using the money yet).

For example if a target has 500 equity + 600 debt – 600 cash = enterprise value of 500 (and equity value of 500). The uses are 500 equity purchase and 600 debt assumed (not including fees).

But my sources are already higher than my uses if im assuming the debt and getting their cash: sources would be 600 cash from target and 600 debt assumed (1,200 vs. 1,100). Am I thinking about this wrong?

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2 Comments

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Based on the most helpful WSO content, here's how to think about the sources and uses for a non-cash-free debt-free (non-CFDF) deal:

Example Breakdown:

Equity Value: $500
Debt: $600
Cash: $600
Enterprise Value (EV): $500 (Equity Value + Debt - Cash)

Uses:

Equity Purchase: $500
Debt Assumed: $600
Total Uses: $1,100

Sources:

Cash from Target: $600
Debt Assumed: $600
Total Sources: $1,200

Analysis:

Sources: $1,200
Uses: $1,100

Explanation:

Equity Purchase: You are buying the equity of the target for $500.
Debt Assumed: You are assuming the target's debt of $600.
Cash from Target: The target has $600 in cash, which you are acquiring as part of the transaction.

Key Points:

Net Effect: The net effect of acquiring the target's cash and assuming its debt should be considered. The cash acquired ($600) offsets the debt assumed ($600), leading to a net zero effect on the sources and uses.
Balancing Sources and Uses: The apparent discrepancy arises because the cash from the target is being counted as a source, which inflates the total sources. However, this cash is also part of the target's balance sheet and should be netted against the debt assumed.

Corrected View:

Net Sources: $600 (Debt Assumed) - $600 (Cash Acquired) = $0
Net Uses: $500 (Equity Purchase) + $600 (Debt Assumed) - $600 (Cash Acquired) = $500

Conclusion:

The sources and uses should balance when considering the net effect of the cash and debt. The equity purchase remains the primary use, and the net effect of the cash and debt should be zero.

This approach ensures that the sources and uses are correctly aligned, reflecting the true economic impact of the transaction.

Sources: DCF Modeling Course ~ Pre-training text.pdf, Notes for Technical Interview Questions, Sources and Uses statement - private LBO model, Sources & Uses - Private Co LBO, Interesting question reg. Net Debt / Sources & Uses

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