Business Brokers and M&A Intermediaries may use or reference the Lehman Scale when discussing their compensation method with a business owner contemplating the sale of their business. The Lehman Scale was originally developed in the late 1960’s and used by the Lehman Brothers when raising business capital for their clients.
Today, the Lehman Scale is also referred to as the Lehman Formula and has been adapted since its inception. It is widely applied to compute the commission paid to the business broker, investment banker or other intermediary in the sale of businesses of all sizes.
The Original Lehman Scale
Before the Lehman brothers developed their scale, the fees charged by different institutions would vary widely, some reaching upwards of 15%. The Lehman Scale standardized these fees and was widely used up until the 1990s. The original formula applied to transactions above $1 million and followed a 5-4-3-2-1 tiered structure:
- 5% of the first $1 million
- 4% of the second $1 million
- 3% of the third $1 million
- And so on, with a 1% charge on everything above $4 million
The Lehman Scale Modifications
A $5 million transaction was very large when the scale was first introduced, but inflation made the formula unsustainable. Now, the Double Lehman Scale is more popular. Each percentage is doubled: 10% of the first $1 million, 8% of the second $1 million, and so forth. A Modified Lehman Scale is also used, which charges 2% of the first $10 million and a smaller percentage of the remaining capital.
How the Lehman Formula Translates into a Commission Payment
The Lehman Formula is calculated by million dollar amount. For example, if a business owner is selling $5 million worth of stock, his fee would be totaled as follows using the Double Lehman Scale:
- 10% of the first million: $100,000; plus
- 8% of the second million: $80,0000; plus
- 6% of the third million: $60,000; plus
- 4% of the fourth million: $40,000; plus
- 2% of the fifth million: $20,000.
- Total commission payment or fee paid to Broker or M&A Intermediary: $300,000
Expenses and Other Costs Related to the Lehman Scale Payment Method
The Lehman Scale typically refers only to the success fee paid to the Business Broker or M&A Intermediary for successfully closing a deal. In addition to the success fee, firms also charge a retainer, which is intended to cover some of the costs associated with marketing the business for sale. Retainers are normally nonrefundable and are often credited against the success fee.
It is also important to keep in mind that the Lehman Scale is based on the value of the deal, not how much cash the seller actually receives. If the business owner has outstanding debts or liabilities, the amount they net from the sale transaction will be reduced whereas the total enterprise or deal value may be used to compute the success fee paid.
How to Negotiate the Lehman Scale or Commission Paid to Sell a Business
Understanding the Lehman Scale is a good starting point to know what you should expect to pay your Business Broker or M&A Advisor when selling your business. While variations of the Lehman Scale are still popular today, you should always talk with your advisor about how they calculate their fees and ask for plain language regarding what is to be included (or excluded) from the basis of the computation.
Understanding the Lehman Scale is a good starting point to know what you should expect to pay your Business Broker or M&A Advisor when selling your business.
You should carefully consider whether the proceeds from the sale of the business, usually paid in the form of an earn out payment in the years that follow a transaction’s closing, are to be included or excluded from the Lehman formula. Also consider paying this success fee when, and only when, the business owner receives his or her payment through an earn out agreement.
As it is customary for the business owner to reimburse the Business Broker or M&A Intermediary for their out-of-pocket expenses during their engagement, it may be wise to negotiate a cap or at least retain the right to pre-approve such expenses.
Fee structures are often negotiated on a case-by-case basis, and you should consider all the factors of your transaction when considering the sale of your business.
Holly Magister, CPA, CFP
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
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I realize that the real answer is “It depends”, but I have to ask, for a small-ish deal ($2 – $4 M) how much room is there for negotiation on the fees?
I have a friend at a PE firm who tells me that the fees for intermediaries are always negotiable – but his deals are always much larger than mine.
Hi Charles,
It is true that Broker Fees are negotiable. And for the size of exit that you are referring to; a Private Equity perspective may mislead you somewhat. We see many deals in the sub $5M sale-space that trade all-in at 10-15% of the total deal value going to the Sellers deal-team in the form of “fees”. Ie: Broker, Attorney and CPA combined.
If you have a strong EBITDA, favorable customer concentration, healthy backlog, competent management team, low CAP-EX requirements, contracts or IP to protect and transfer the clientele, etc – then you have a highly desirable business that should trade above historical multiples and thus might warrant a reduced fee structure.
My favorite way to counter a Seller that wants to negotiate the fee is to create a strategy where the Broker’s and Seller’s interests are aligned. In other words, possibly a stair stepped fee agreement will solve the dilemma. The first $2m could be at 8% with the next $1M at 10% and if they exceed your top figure possibly you could reward the Broker with 20% of any amount you collect over $4M.
If you have a good business that is READY to transfer and your Broker believes it will be well received by the Buying community including passing due diligence without consternation – they should be willing to get creative with you regarding the fees.
On the other hand, if the Broker senses this will be tough or that your expectations are off – they should stand their ground on the fees.
People think that selling a business is like selling a house and that is such a misperception. Businesses have dozens of variables in play and they are constantly changing. Buyers also have dozens of variables involved in their quest to acquire and those variables fluctuate on the Buyer’s side as well.
Selling a business is tough work that is not for the lazy or faint of heart and Good Brokers earn every penny they get. I’d venture to say that most Brokers under-charge for the complexity and risk that they take on in an engagement. Therefore, if you’ve found a Broker that can get the job done and has a history of delivering at a premium multiple; you should pay what they are asking and include the caveat that they must deliver cash and terms in excess of their total fee arrangement. We offer a “true-up” at closing to make the fees commensurate with the value we delivered. This way both parties wind up with a great deal.
Charles,
I am a Business Broker advisor with ExitPromise and I will share with you how brokers in my firm determine a fee for our services. The fee structure can vary greatly depending on several factors. We consider key factors such as:
– Profitability of the business
– Trend – growing or declining sales and profits
– Industry
– Growth opportunity
– Effort required to find a qualified buyer – marketing and advertising
– Are the books and records for the business in good order
– Operations factors – location, condition of property and assets
– Quality of employees and customers
For most larger engagements, we provide clients with a custom proposal that describes the services we will provide and the associated fees.
You should get a clear understanding from a broker as to the services they will provide through the entire sale process for their fees. This varies greatly between brokers. Some firms simply advertise a business on websites and wait for replies. In many cases, our firm may use a marketing strategy that could include website ads, trade journal ads, and/or a proactive mail and phone campaign to contact the top buyer prospects for that business that could include private equity groups, similar businesses in the same industry, other brokerage firms, etc… Also, look at the quality of the marketing materials the broker will provide to present you business in the marketplace. To successfully sale a business and get the best sale price, it is critical that the broker provides effective advertising that will attract the most qualified buyers. And, the broker should provide buyers with an in-depth first class written presentation on your business to create a great first impression and get top buyers to meet you in-person.
Depending on the size, type and quality of the business, and services we are asked to deliver; our fee can range from 4-12% of the sale price of the business.
Talk to more than one broker, and be sure to evaluate the services provided as well as the fees. Both can vary greatly.
Let me know if you have any questions.
Greg Younts
Hello,
I am introducing a developer/operator company in the power generation space with project deal flow of $450m over the next 12 months to a PE Fund in the same space. I would be involved to facilitate the communications and handle the tax equity portion of each project. What is a typical rate for the Fee Structure for the Equity and Debt portions of a project and a potential share of on the operating cash flow ? The first project is $100m with a $30m equity and $70m debt structure. Equity returns are 15%. Thanks
Hey Frank,
Congrats on originating such an opportunity. One needs more details to provide competent counsel. For example, I’m not sure what you mean by “handling” the tax equity. I’ll make a few suggestions about the structure.
First, it’s in your interest to get a well-negotiated written mandate/agreement from one or both of the parties (with appropriate disclosures), either the developer/operator company or the PE fund.
Second, check to make sure you’re not violating any securities laws. You might be brokering a securities transaction, and how you structure your compensation could raise red flags. You’ve got state and federal laws to
Third, talk to other PE funds in the space that willingly pay advisory fees to get a sense of what the market rate is, and use it to help establish your benchmark.
Warm regards,
Scotch&Palm Law and Consulting
I signed a mandate agreement to an art collector in order to sell some of their artifacts. The artifacts that I will sell are listed in the agreement – and is worth from 100 to 400 Million US. Now the next step is the commission that we are going back and forward with. I want 3% and they countered 0.5% – I will liaise with the buyers and go to meetings, get the paperwork from buyers/lawyers, the website done, fly internationally to meet prospects and so forth. So more than an introduction for them in order to find them one or several buyers for their artifacts. Travelling, website costs will be from my own pocket. I have the mandate until the 31st December 2018 and after that we renew or finish our collaboration. What is a far percentage or should I take a fix payment? Never worked with finding a buyer to an art collector before so I bit out of my comfort zone… any suggestions on what to write on the contract as commission? Many thanks
Sunshine
Good morning Sunshine,
I truly don’t know the answer to your question. The Lehman formula is used and has been used in the context of business mergers and acquisitions. This article was intended to educate those who are contemplating the sale of their business.
I would think there is a similar type of standard formula (even if it’s merely a percentage of sales proceeds as you’ve proposed) when selling an art collection.
Maybe someone in our audience could weigh in on this question?
Sunshine, congrats on securing the mandate.
There’s no “one” answer to your question, but as a practitioner of Concierge Law and Strategy, I start with the vision, mission and values of a client.
Here, I don’t have that information, so I would base my commission amount based on whether this will advance your broader vision and mission, or if it’s simply for a payday. If the latter, charge more.
Most critically, there are three steps you should consider:
1. Seek an advance to cover your costs
2. Hire legal counsel to protect the intellectual property that you’re going to be generating along the way (website, copyright, trade secrets, etc.)
3. Work with counsel to negotiate the terms of the mandate renewal. I’ve seen situations where the lack of good contract protections basically drummed up attention for the arts/assets AND a bad contract screwed the agent out of a commission.
Hi,
Will PE Firms pay referral fees for companies they acquire?
We are an executive search firm.
Lehman Scale Formula?
Thank you.
John Farrell
Hi John,
Yes, because it’s a seller’s market.
No, The Lehman scale formula (or a variation thereof) is what’s used by the representatives selling a business.
Referral fees on the buy-side or sell-side are much lower — more like 10% of the fee the M&A Advisor is paid.
Private Equity firms typically have a team searching for businesses for sale.
Hope this helps…
We are a South African based “funding intermediary services” firm (or broker) that facilitates M&A and Private Equity transactions by introducing companies seeking growth capital to PE companies and vice versa. We would like to work with US based PE firms that are looking at such opportunities in Sub-Saharan Africa. My question is, would we be subject to US SEC rules as a South African based company working with US PE firms? Who should we be signing the Mandate Agreement with, the US PE firm or the target company? Typically, who pays for the success fee, the US PE firm or the target company?
Kind Regards
M. Ntsoko
Marks,
I am a partner in a fully licensed (Exempt Market Dealer, or EMD) Canadian-based advisory practice, and we had to arrange a chaperoning agreement with an SEC registered firm for the purposes of running capital raising mandates. So the general answer is yes.
As for fees: typically, the seller or the company / capital seeking entity pays the fee, unless you have a standing buy-side agreement with a PE firm that will compensate the firm for the work required to source and dilligence deals. We have done both.
Hi Andrew
Great answer, thank you! Just for clarity, what you are then saying is that, it doesn’t matter even when the investment transaction happens far away in Sub-Saharan Africa where we are based, outside the US, for as long as we are dealing with a US PE firm, our company will still be subject to SEC rules? You are then suggesting that arranging a chaperoning agreement with an SEC registered firm is the solution?
That’s exactly right, Mark!
Not a broker brought buyer and seller together real estate deal land cost 850k with new building to be built for a tot. Cost of 2.4 mil, how much finders fee can I ask for from buyer or seller or both
Referral-only usually runs about one half of one percent from the seller, if you have asked and agreed in advance. If the buyer is putting up the building, that is the investment for which he purchased the land, and has nothing to do with you.
Hi Holly,
I recently sold my business to a private equity group. They’re now interested in hiring me to find and pursue other similar businesses from my industry which they also hope to acquire. I know the industry pretty well and believe that I can find them several opportunities. Purchase values will likely range between $5 million and $25 million. What is an appropriate commission that I should expect for being in a finder role like this?
Thank you,
Kevin
Hi Kevin,
Congrats on the sale of your business! Nice way to end the year!
What you are proposing to do (charge a percentage of the transaction for sourcing prospective companies for acquisition) may fall under the broker/dealer licensing rules so you should proceed with caution and learn more about what the law may require of you.
If on the other hand, you were employed by the Private Equity Group to source deals, you would not need licensing and could negotiate whatever salary you and the PEG found to be fair. Most of the PEGs I work with have in-house ‘business development officers’.
Hope this helps a bit…
I have a deal where a contact of mine brought a friend of his to our meeting who has an upstart developing company with an opening project of around 30 million dollars. I’m to small of a contractor forth is project but know of a company who would jump at the oppurtunity. How much should I ask for to bring the two together.
Hi Porter,
The Lehman Formula is not typically used when introducing a friend or colleague to another who may do business together. Doing so is a generous and effective way to build your reputation in the business community and will pay off tremendously over the span of your career. The Lehman Formula is used for Mergers and Acquisitions and it is intended to compensate those who bring capital or buyers and sellers together. The work done by such professionals in the context of capital and M&A is extensive if done properly and should not be confused with networking.
At least, that’s my opinion Porter!
Hi Holly,
My group has a medical device, patented, that is unique. For two years we have done much of the work, ie, patent, TMs, collateral, trade shows, packaging, product production, social media,website, HCPC code, etc. This product needs strategy and development General advisement for project funding and marketing execution–we have contacted a marketing group that wants a $25k retainer fee plus a Lehman scale success fee-they claim to have someone interested already–if they are not successful-is it kosher to ask for partial retainer refund?
Good morning Mark,
In my opinion, anything which is ethical and you negotiate with another party is kosher in my book 🙂
That said, here are a few other thoughts I have for your consideration.
In my experience, Marketing companies have expertise in packaging a profound message to attract buyers, investors and other stakeholders. Typically, they do not have contacts such as the investors you are seeking. I’d be cautious about paying them a retainer for successful investment. Pay them (or someone like them) to do what they do best–creating a message to attract what you are seeking.
There is plenty of money in the VC pockets and you should not have any trouble attracting gobs of interest in your medical device.
Keep me posted!
All the best Mark…
I own a medical recruiting firm and have the opportunity to introduce companies that want to be purchased to companies that are interested in buying. Several years ago one of my clients called me and asked me to help them sell their company. They were using Goldman Sachs and were not having any success. Their sales revenue was $90M per year. I introduced them to a large company that purchased them for $450M within 6 months of my introduction. I got nothing, since I was helping a friend. I have a similar opportunity; but this time, I want to get paid. What is a fair amount for me to ask for making an introduction that results in a sale similar to the one mentioned above?
Thanks
Hi Tony,
Based on your question, it doesn’t appear to me that you are licensed to represent a business for sale under the SEC or you State.
The SEC rules which apply to receiving success fees for deals have recently changed. You may have an opportunity to be paid, however you should carefully understand the legal landscape before doing so.
Here’s the letter from the U.S. Securities and Exchange Commission about M&A Success Fees for Privately Held Companies.
I realize you didn’t ask for all of that… I just want you to be fully informed.
Now, to answer your question. Given the size of the deal and the amount an M&A Advisor or Intermediary would be paid to represent the buyer or seller, you should consider how much your part as the introducing party is worth relative to the other duties and responsibilities. Kevin (above) asked a similar question…
All the best…
Hi Holly,
I introduced a deal worth $180-$200M when it’s all said and done. First capital amount the business owner is raising is $20M.
I looked at the Lehman Scale, but seems that is for more technical and as you say “a lot of hard work”.
What kind of fee/s should I expect/ask for now and/or ongoing as the introducer?
Very much appreciate your thoughts and counsel!
Best Regards,
Kevin
Hi Kevin,
If you are introducing acquisition targets to potential M&A firms, it is not unusual to be paid 10 to 20% by the M&A firm.
I can’t tell from your question if the introduction was directly made to the buyer or if it was to an M&A firm.
All the best…
“Thanks Holly,
The seller owns a product he wishes to develop and a business idea he wants to build, I’ll call him Mr. A. He has had this “dream” or idea for 10+ years.
The buyer (I’ll call them Group B) is a joint venture group who has the money to invest in something they see as valuable. They will put up the money for his idea and join him in it for the long term (sounds like at 7 to 10 years). But he remains in control and leadership on the idea and keeps production here in the US at least initially (first couple years).
I introduced Mr. A to Mr. C who is the connection to Group B.
I know Mr. A and Mr. C and put them together.
There is now a Memorandum of Understanding between Mr. A and Group B.
As I mentioned the total funding for this project is likely going to be $180-$200 million.
Please just share what I should ask for as a “finders fee” or “introducers fee.”
It was a few emails back and forth and a conference call and some phone calls.
No office space was used, no posters or overhead costs.
And that doesn’t minimize the connection – just makes it simpler I think.
Thank you!”
Hi Kevin,
Well, it sounds like you’ve got a few great relationships!
Because you’ve already made the introduction to the investor group and did not ask to participate by way of a finder’s fee, going to this group at this point to request payment may be very difficult to do.
That said, you may want to consider asking both parties what they feel to be a fair finder’s fee/compensation for your part in the transaction. If they value what you did and would like to be considered for future deals you may be privy to, they just may be pleased to write you a check!
As for the amount, it’s not unusual for the introducing party to receive roughly 10% of the fee paid to a transaction’s Intermediary. Using the Lehman Formula, it’s easy enough to calculate a reasonable fee range to start the conversation.
All the best…
Looking to broker a large deal. Asking price is in the mid 8 digit range. Since the Lehman scale was developed back in the 70’s. Should I set the 5% at the asking price and go 4%, 3% and so forth down the scale.
Hi Richard,
If your brokering a M&A transaction in the mid 8 figure range, using 5/4/3/2/1/ would be way above the market rates.
2% on the first $10 million and something less above $10 million is what I see being used in this deal size.
A deal this size usually takes a licensed Intermediary with a team of people to negotiate and close the deal. That’s why they are paid so handsomely. It’s a lot of hard work!
All the best Richard…
Holly,
So what do you see as “market” for a mid 8 figure institutional capital raise?
Thanks,
Hi Jesse,
What I’ve observed in terms of a rate for a capital raise is approximately two percent (2%). Given the size of the capital raise you are seeking, you may have room to negotiate.
All the best…
Afternoon!
I’m in the process of introducing an innovative organisation who is looking for an initial investment of $1.5 million to a VC and possibly Business Angels and or Institutional investors. I’ve now been advised that the overall investment required could reach $20 million. (They have a ‘VERY UNIQUE PRODUCT’) My question is: How would I structure the commission? I wanted to use the Lehman formula, (5,4,3,2,1) then using some of the commissions gain from the transaction, to inject that back into the company for an equity share. They want FICCI and the British Chamber of Commerce to be the arbitrators should there be a disagreement, but I want the whole contract to be governed by UK jurisdiction and law. The VC’s have no involvement in the commission structure. I’m a UK resident, the company is in Asia and the VC’s are in the US. Can you advice me how best to structure this.
Kind Regards; D.F.A
Hi Dennis,
To my knowledge, I don’t believe the Lehman Scale was intended to be used to compute a commission when someone is raising business capital from Investors, whether the investors are Venture Capital or Angels. Instead, the Lehman Scale was developed and in practice is used by Business M&A Intermediaries and Investment Bankers who are properly licensed to sell businesses.
As for UK Jurisdiction laws, rules and practices related to Venture Capital and Angel investing in start ups, I am sorry to say I unable to help you. My experience is based in the U.S.
In my work in the United States, I don’t normally see successful Startups paying a commission to someone who sources Venture Capital or an Angel Investment. Instead, I see the Startup founders exploring their own networks to source startup capital. That’s after they’ve depleted their own savings accounts and have approached their friends and family.
All the best…
Thank you for the information Holly.
Very much appreciate
Kind Regards
D.F.A
Good explanation of this method Holly. M&A Advisors often expect a retainer to cover their out of pocket expenses, which also serves as skin in the game on the Owner’s part.
Hi Paul,
Thank you and I agree with you! I’ve found some business owners reluctant to advance expenses in the form of a retainer… I don’t think they like the term ‘retainer’. It feels like something they pay Attorneys… at least that’s what I’ve observed.
One of the biggest hurdles for business owner selling his or her business is the notion of letting go. For so many, their business serves as their identity. Asking them to put up some cash in this form may shine a big bright light on the issue.
Thanks for your thoughts Paul!
Holly