Sources and uses of funds refers to the fund that we use in buying a company My sources of funds ask, where does it come from? And the uses of fund ask, what do we use it for? Our major use of funds is to buy the company (the equity purchase price), That's the amount of money that the selling share holders will require from us So where do we get that from? The two big sources are debt and equity We need to be a little careful here because I've now got two equity figures on the screen On the left hand side, I've got the equity purchase price (that's the amount the sellers receive) But on the right hand side, I've got equity issued and you'll note that it's a smaller figure They are completely different despite both having the word equity in Second of all, you may hear of a term called cash consideration. How much cash will the selling shareholders receive? Well if we've issued some debt, that gives us a big pile of cash we can pass onto the selling shareholders But the equity issued, well that means the selling shareholders will own shares in the combined business And that is not part of the cash consideration So that's a short version of our sources and uses of funds, there are many other items that can go into this as well Here I've got a bigger diagram and we've put those in that we already know, equity purchase price, long term debt and equity issued Let's look at some other sources of funds As well as long term debt, you can have short term debt And here we've used revolving credit facility Now you might ask, why would a bank be willing to give us a revolving credit facility (short term funding) In order for some long term use (buying a company). We'll answer that in just a second Another source of funds we could use is the acquirer's cash, any cash they've got sat on the balance sheet (let's use that) So that gives us a longer list of our sources of funds, what about the uses of funds? Well as well as the equity purchase price, we may want to refinance the target company's net debt Maybe we think that we can get it cheaper (lower interest rate) But also any debt that they have, probably has to be refinanced if the company is bought out We may also want to pay any transaction fees, such as advisors, debt issuance fees or equity issuance fees Next up, you've got an operating working capital adjustment Imagine I'm buying a toy company at christmas At Christmas, toy companies (toy producing companies) have very little inventory However I know that by the time the deal finishes in summer The company will have a very large inventory, so I know that by the summer, by the time the deal closes I'll need to pay for something extra, this large asset sitting on the company's balance sheet So how do I fund that OWC adjustment? That's your revolving credit facility. So we've come back to where that comes from Operating working capital adjustment is thus a short term asset, how do we fund it? With a short term source of funds Now in terms of other uses of funds You may have pension deficits, operating leases, other claims on the business that all need to be paid for