Sources and Uses for non-CFDF deal

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:

1. Equity Purchase: You are buying the equity of the target for $500.
2. Debt Assumed: You are assuming the target's debt of $600.
3. 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