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Business Brokers and M&A Intermediaries may use or reference the Lehman Scale when discussing their investment banking compensation method with a business owner contemplating the sale of their business.
The method to compute the advisor’s compensation 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
Before the Lehman brothers developed their scale, the fees charged by different institutions would vary widely, some reaching upwards of 15%. This method of compensation 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
- 2% of the fourth $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 or Modern Lehman formula is more popular as a method computing the advisor’s investment banking fee. Each percentage is doubled: 10% of the first $1 million, 8% of the second $1 million, and so forth. A Modified Lehman 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 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.
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.
What is a typical finders fee, if someone were to give the lead to a broker, and a sale results from this, is this addressed in the Lehman scale or other?
Hi ALM (again) 🙂 ,
Most brokers pay between 10 to 15% for such leads. 10% is more common.
The Lehman formula is how brokers are typically paid by a seller when they successfully sell a business. And whatever is paid by brokers for leads that ultimately convert to a closed deal comes out of the broker’s fee they receive for their services. It’s not in addition to the broker’s success fee.
All the best…
Does or should a Lehman calculation be used for other things in a sale, we are selling a company, and we have negotiated a lease as we own the real estate, broker would like to use the scale for compensation on this as well.
Hi ALM,
Well, including the lease in the base for the Lehman formula computation is certainly beneficial to the business broker. However, it’s not consistent with the market.
Selling a business as a broker is not the same as representing an owner of real estate in a leasing arrangement. Licensing for these types of professional services in many states differ. So, check out the broker’s licensing — both in terms of what’s required to broker business sales AND to represent real estate leasing arrangements — and whether the prospective broker actually holds the appropriate licenses.
Hope this helps you!
We are working of a deal where the investor we are bringing will be providing a minimum of $50 million to a max of $250 million.
How would you structure that spread?
Hi Robert,
Before I address your question, it’s worth knowing that at this point in time, a finder’s fee for a deal this size requires you/your firm to be registered as a broker dealer by the U.S. Securities and Exchange Commission.
There is a proposal on the table to exempt certain people in certain types of transactions, however it is not law yet.
The Lehman formula, which is this article’s topic, is related to the seller’s side fees for transaction representation, so it doesn’t apply.
I normally see capital raise fees for lower middle market between 1 to 2%. Of course, that’s negotiable and it decreases as the money raised increases.
Hope this helps a bit…
Hello,
I am going to sell my 3PL storage and transportation business/s and I am close to signing on with an M&A firm that specializes in my space. They are using the Double Lehman Formula format but the fees are much higher. I am trying to determine if these fees are over priced or in the current fair market range and I am hoping you could assist. I am in Canada if that makes a difference.
Thank you
1st M = 10%
2nd M = 9%
3rd M =8%
4thM=7%
5th M=6%
6th M = 5%
7th M= 4%
8th M=3%
9-30M = 2%
Over 30M+ = 10% per M
Hi Todd,
Your location in Canada is not relevant in your situation.
The Investment Banker’s pricing is above market.
I’d be happy to point you in the right direction. Feel free to call my office at 888 803-3677.
I have an ecommerce brand and am being approached by buying companies acquiring multiple ecommerce business as well as brokers to facilitate a sale. I’ve been quoted 10% fee by these brokers; does that seem reasonable or should I look for something closer to the Lehman scale? I’d anticipate a sale of $3.5-$4.5M with inventory
Hi JD,
Using a straight 10% success fee on a deal in the $4M range is too high.
You can negotiate this to look more like the double-Lehman formula.
If your business is in good shape to sell, the brokers will negotiate.
On the other hand, if it’s got some bumps and bruises they’ll have to work to overcome, they may not be willing to negotiate as much.
Happy to discuss with you, if you’d like.
Hello! I have been called upon by a very large PE firm to provide advise on an industry they are not familiar with yet I an expert on. They are looking at a very large potential acquisition. Over $500m.
They have only offered me a $250 hour consulting fee yet I know I can make substantial contributions in either saving them millions by evaluating business more accurately or opting to not acquire at all, or make them millions by helping them feel confident the deal is a solid investment with ROI exit plan potential.
I want to work with them and don’t want to lose opportunity, yet why should I provide 35 years of advice and expertise for a mere $250 an hour???
Thank you for any feedback!
Hi Patrick,
Congrats! Clearly you’ve got expertise the PE firm needs and you should be paid accordingly for it.
I agree with you about the $250 hourly rate — it’s below market, given the benefit they will receive from your counsel.
The rate you’ve been offered is more typical in a long-term expert engagement where you’d be working for several years on a project. It’s a typical consulting fee rate and would be appropriate for a mid-level advisor/consultant.
Top tier advisors/consultants are paid in the $750 to $1,500 (plus) per hour range.
My suggestion is to estimate the number of hours you believe you’ll need to do the job properly. With that in mind, give an honest assessment of your abilities. If you’re on the top tier end of the scale, redo the math based on the hours you estimate needed.
Then calculate the value of your advice if they make a good decision based on your input.
You’ll have a range for your services from the hourly rate model to the value of the advice you offer them.
With this information in hand, you’ll be in a better place to negotiate with them. Maybe offer them a flat fee with a minimum number of hours dedicated to the project. Include a clear description of the deliverables in your proposal.
This approach shouldn’t surprise the PE firm. They work with top-notch advisors are who are paid well. And if they make a bad decision because they don’t know what they don’t know, it will cost them millions and maybe even their career! If they truly value your services, they will pay you what your worth!
Good luck Patrick! I am rooting for you…
I am bringing a deal to PE firm. PE firm will be using Lehman fees formula for finder fees.
“Transaction Fee shall be an amount equal to 5% of the first one million dollars of the Aggregate Value plus 4% of the second one million dollars of the Aggregate Value plus 3% of the third one million dollars of the Aggregate Value plus 2% of the fourth one million dollars of the Aggregate Value plus 1% of the Aggregate Value in excess of four million dollar”
Question: If the transaction is $50 Million then how I can calculate the finder fees? Please explain how to calculate?
HS:
This is just math….
5% of 1Mil = 50K (the first million)
4% of 1 Mil = 40K (the 2nd million)
3% of 1 Mil = 30K (the 3rd million)
2% of 1 Mil = 20K (the 4th million)
So the fee for a $4 Mil deal = 50+40+30+20 = 140K
……………….
$50 Mil – $4 Mil = 46 Mil x 1% = 460K
……………….
So total = $460K + 140K = $600K total fee on $50 Mil transaction.
We are about to close a loan agreement with an investment fund of more than 500 M, what is the finder fee that should be paid to whoever brought the parties closer so that this investment fund contributes the money to the company?
I’m setting up an M&A firm for mainly acquiring SMEs business estimate transaction size range from US$500k to 50m or higher. I am engaging (with top regional or Big4) third-party legal and accounting firm for DD and/or Audit works. Purpose is to have a good reputation for getting debt financing from investment banks. Those potential partner offered me with some upfront fees when the work start however I like to negotiate to get deferred or delayed fees payment only after deal closed. As soon as I get the deferred or delayed fees possible I am willing to pay a slightly higher than market price. Appreciate if you could kindly advise what should be the range since my transaction size are involve below 1m and above 1m please. Or Lehman 5/4/3/2/1 formula applied to my scenario. Thanks a lot.
Hi Watana,
Happy to offer you my thoughts…
The range of your proposed deals in your firm is very large. I’ve yet to see a single M & A firm representing deals from $500,000 to $50 Million and that’s simply because the skills of the dealmaker, selling process and network of buyers differ tremendously for main street business transactions and middle market transactions.
And that means the way in which an M & A advisor is compensated will be very different as well. Not just in the dollars paid to them.
Selling a $50 million dollar business typically requires research/preparation fees, retainers, travel and other deal-related expenses.
Not so for a main street deal. Retainers and other out-of-pocket expenses are typically minimal in a smaller deal, at best.
My observation of the transaction fees charged to business owners selling their businesses or raising capital is that they truly vary greatly from firm to firm. The Lehman scale is a starting point for consideration.
Good luck with your new firm!
What happens if the business you’re representing turns down a lucrative offer? The time involved was over a year of my time. The offer was for $60 Million plus $250 million loan from a prominent PE firm?
Hello,
Brokering a deal for building a logistics park in Saudi by bringing both the investor in Saudi and the developer from Hong kong.
What is the fair finders fee percentage of the total project cost?
Talking about a deal worth from $200m-$300m
Also how much equity should i ask for?
Adding that i will ask from both sides
Appreciate your thoughts and wise counsel
Thank you