New on FinoLib · Volume II: Capital Markets
New on FinoLib, my finance education website: I have published an article called LBO Model: Sources and Uses Explained Step by Step, from Volume II: Capital Markets. Here is what the article explains, written as a short expert briefing; the full piece, with every worked example, is one click away.
The idea in plain words
Before modeling a buyout, you list where every dollar comes from and where every dollar goes. That table is called Sources and Uses, and it is how you rebuild the real price. Enterprise value is the price of the shares plus the debt that must be refinanced, minus the cash acquired, which is $920 million, or 8.0 times EBITDA, in this example. Fees are a cost on top, so the all-in cost is $950 million.
Key points
■The rebuilt deal: $330 million floating Term Loan B, $220 million fixed notes, $400 million sponsor equity, $20 million target cash.
■Debt is sized on EBITDA: 4.78x, with 2.65x interest coverage at entry.
■A 6.00x maintenance covenant leaves a 29.9% EBITDA cushion in Year 1; covenant-lite loans passed 90% of US issuance in 2021.
■Treating total uses as the price can hide multiple expansion: $69.6 million in the chapter’s counterexample.
A closer look
Every LBO model opens with a Sources & Uses table — a simple accounting of where the money to fund the deal comes from (Sources) and where every dollar of it goes (Uses). The two sides must balance exactly.
Sources and Uses balance by construction: every dollar raised must be accounted for on the Uses side. The table does not show the price as a single line, so you rebuild it. The target has LTM (last-twelve-month) EBITDA of $115 million and is bought at an entry multiple of 8.0x, echoing the comps and precedent multiples of Part 1: Corporate Finance & Valuation:
The debt is sized on EBITDA, not on the price: $330 million of Term Loan B (2.87x) plus $220 million of notes (1.91x) = $550 million, or 4.78x. That is 57% of total sources, and 60% of the debt (330 ÷ 550) floats with SOFR, which was about 3.9% in early October 2026; the model assumes 4.0% flat, so the loan costs 7.50%. First-year cash interest = 330 × 7.50% + 220 × 8.50% = 24.75 + 18.70 = $43.45 million, and entry interest coverage = 115 ÷ 43.45 = 2.65x. Section 2.7: The LBO Model — Debt Paydown and Returns runs this deal forward.
Under the hood
Under the Hood: Covenants, the Lender’s Early-Warning Wire
A maintenance covenant must be met every quarter, for example total debt ÷ EBITDA no higher than 6.00x in Year 1, stepping down to 4.50x by Year 5. An incurrence covenant is tested only when the borrower does something, such as borrowing more or paying a dividend. Covenant-lite term loans carry only incurrence tests (often keeping a “springing” maintenance test on the revolving credit line), and they passed 90% of US leveraged loan issuance in 2021; private-credit loans more often keep maintenance tests. Headroom is measured in EBITDA.
Decision rule
Before reading any LBO return, run three checks on the Sources and Uses. One: rebuild EV as equity price + debt refinanced − cash acquired, and confirm EV ÷ EBITDA equals the quoted entry multiple. Two: confirm fees sit outside EV, and compute the all-in multiple including them (8.26x here). Three: confirm the exit multiple is compared with the true entry multiple, so any difference is labeled as multiple expansion or contraction. If any check fails, fix the model before discussing returns.
The costliest mistake
Calling total uses “the price” and so hiding multiple expansion. Suppose the table had shown a $740 million equity purchase with the same $150 million refinancing, $20 million of cash and a $920 million total. True EV would be 740 + 150 − 20 = $870 million, or 7.57x, not 8.0x. An exit “at the same 8.0x” would then silently add (8.0 − 7.57) × 160 = $69.6 million of exit value from multiple expansion.
Recap
The rebuilt Sources and Uses reconciles: enterprise value of $920 million (8.0x EBITDA) equals the $790 million equity price plus $150 million of debt refinanced minus $20 million of cash, with $30 million of fees on top. Debt is sized at 4.78x EBITDA, covenants give lenders early warning, and comparing exit with the true entry multiple exposes any hidden multiple expansion.
What the full article covers
The full article includes a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, LBO Model: Sources and Uses Explained Step by Step, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance