Forget IRR - start with Sources & Uses
Why the sources & uses table is far more useful than most think
Happy Thursday!
Most LPs spend 95 percent of their diligence on the IRR (reminder to not do that), the rent comps, or the pro forma. The place I usually start is the S&U (Sources & Uses) table, which some decks don’t even have.
In short, a S&U table is exactly what it sounds like - it explains what the sources of your capital are for this transaction and the uses of those funds, line item by line item.
Today, I wanted to take some time to explain why I value it so much and what things to look out for as an LP (and why it’s definitely among the things you should have prior to investing in a deal).
Here are the top 5 things I look for:
1. Acquisition Fees
Always check the Uses for acquisition fees.
A normal fee might be 1 to 2 percent. Anything above that deserves a conversation - more on that and other common missteps here
On a 20M deal, every 1 percent fee is 200k. That is real money that you and the asset must earn back - more on fees eroding returns with an example here
2. Working Capital
Working capital is normal. In fact, you want them to have a cushion because running out of cash is bad for everyone involved