Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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Business Brokers, M&A Advisors and Investment Bankers may use or reference the Lehman Scale when discussing their compensation method with a business owner considering 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, M&A Advisor, Investment Banker or other professional serving as an 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.
Hi,
Thank you for your informational article. My partner and I are forming a $20 million private equity fund and will engage someone to raise the capital. This person will find, pitch, and close for a fee. My thinking is that an appropriate fee would be somewhere between a standard 1-2% finder’s fee and the Lehman scale. What do you feel is appropriate?
Additionally, we plan to pay them directly via the fund capital once raised. Do you agree that this is feasible so long as our LPA details it?
Thanks!
Hi Mike,
While I do not purport to be an expert in Private Equity, it’s my understanding the money raising fee is around 2%.
The Lehman Scale is typically used in the context of selling private businesses to third parties.
Where the funds to pay your placement fees related to raising private equity come from is not something I know much about.
Sorry I couldn’t help you.
Good luck with your PE fund Mike!
Hi – Thanks for the insightful/educational article. I’ve had a broker approach me with a buyer interested in purchasing my company. The broker has proposed a Double Lehman fee structure that stops decreasing at 4%. Many of the scenarios I’ve researched have described the fee structure when a business is actively pursuing a buyer. Should I expect a lower fee structure when I’m not marketing my business to be sold? If so, are there any standard practices to be aware of?
Jordan
We are raising $2M for a film development project that will be a major studio released, global film with an earning to cost ration of nearly 5:1. A friend knows some investors, and she balked at our 3% finders fee agreement, referring to the Lehman Scale Formula as more appropriate. She is not a broker, just well connected in the film industry. Any advice?
Hi Jason,
Your 3% finder’s fee you’ve offered for investor introduction is generous in my opinion.
The Lehman’s formula applies to the fee paid when a seller is represented by a broker in the sale of his/her business. There is a tremendous amount of work that’s involved with the business selling process, which is why the pay scale is higher.
Hope this helps…
Good luck with your project!
Jordan,
I am a Business Broker adviser with EXIT Promise and rarely find it beneficial to be in the role as transactional broker representing both buyer and seller. In that role, a broker cannot advise either party in the negotiation process. I have only done this once in a case where the buyer and seller felt they were for the most part in agreement on the terms of the sale. If you need an adviser, you do need to retain the services of a broker to represent you. When I am hired by a business owner that has already found the buyer, I reduce my fee since I do not need to market the business. The fee varies depending on the work that will be involved in completing the transaction. You may want to get proposals from different brokers for their services in this engagement.
Greg Younts
Hi Jordan,
It’s not a good idea for a broker to represent both the seller and the buyer. Both the seller and the buyer should have their own representation!
In this case, it sounds as of the broker has a relationship with the buyer and it is the buyer who should be the party paying him/her. As the seller, your not responsible for this cost.
Instead, I recommend you retain your own representation with a broker who knows your industry and has represented sellers successfully. If your broker is not sourcing buyers, it’s reasonable to ask for a lower success fee.
Hope this helps.
If you need to source a broker to represent you, here’s where you may get assistance.
All the best…
We recently formed a hotel investment group. Key Promoter have extensive experience in the hotel industry.
Our Acquisition Target is a stable performing top tier brand that is strategically located. The property should continue to perform even in slow market. Preferred rate of return is 8%.
We are are trying to raise $2-3 million equity. As we work to raise equity, we came across someone who mentioned fee between 3-5% of the raise.
Is that normal? I had heard fee is normally around 1-2% for stable performong hotel deals.
I am the lead intermediary on a hotel/casino transaction that will likely be structured as a co-development deal. My intermediary team has successfully identified an extremely financially strong development and overall venture partner for our client. This partner will bring forth the first tranche of funding and subsequent tranches to fund what is projected to be a half billion- dollar project. Make no mistake, this is a legacy project. Im struggling with how to charge and I do have a 5% fee agreement in place to make upfront fees off of the first several million. Does this fee make sense? And would it make sense to ask for a longterm equity percentage on the deal?
Hi Henry,
In my experience, the Intermediary that brings capital to the deals are typically paid between 1-to-3% tops. It sounds to me as if that’s the type of partner your team has identified for the project. Correct?
As for equity participation, I’d be prepared to defend why what your team is doing is worth equity. Not trying to put down what your team has done or will do. Equity is something that’s normally not paid to intermediaries unless they’ve agreed to take a below-market success fee up front.
All the best to you as you negotiate a fair deal!
Hi Ani,
You’re on the right track. 1-2% is more in line for sourcing capital. Especially for a business such as yours.
All the best to you!
I’ve been talking to brokers about selling my business and am not certain it’s worth paying them when I have people calling and emailing me to buy my business.
With so many buyers interested in my business, why should I pay a broker? Most of them are saying their fee will be about 6 to 8% of the total deal.
Could I not just have my Attorney handle the negotiations?
Hi, Mickie. I’m happy to answer this question.
A high-quality brokerage firm will earn every bit of their pay:
(1) Through securing far more money for your business from buyer competition
(2) By reducing onerous terms from this same buyer competition.
(3) By performing pre-sale diligence to defend the offered price during the buyer’s due diligence period when buyers often try to lower their price
(4) By allowing you to spend the time keeping your business operating well as the distractions of managing the deal process can often derail business owners from this important task
(5) Helping you maintain confidentiality of an impending sale so that your customers, suppliers, and employees are not unnecessarily scared by the rumor mill.
There are other reasons to hire a good broker, but these are some of the most important.
Things like working capital and inventory allocation swings can offset broker fees several times over. Negotiating these pieces of a deal can be tough for someone who has never done it. In addition, if your buyer needs lending assistance, a good broker will know what data to provide to get the buyer qualified.
A generalist attorney will be outmatched every time, costing you much in the long run. You want a team with credentials that go toe-to-toe with the buyer’s M&A team.
Just as you are an expert in your business and can do it much better than someone who has no experience with it, an top-notch business broker can manage a deal process far better than any other alternatives you may have.
Mickie, I am a Business Broker Adviser with EXIT Promise and I have to say you ask a great question. I don’t know the specifics of your business and situation to comment on what is a reasonable fee for you for broker services, but I can offer some general advice.
The Broker’s fee should reflect the services they will be providing for you. If you think you have a strong pool of qualified buyers and don’t need a Broker to confidentially market your business to find buyers, the Broker’s fee should reflect a lower level of service.
On a few engagements, I have worked with a business owner who has already found their buyer or potential buyers. In these cases, I worked with the attorney to co-negotiate the deal, managed the due diligence process with all parties and in some cases provided a business valuation for the owner. My fee reflected the effort and expertise required to provide these services.
On other engagements, I worked with a buyer(s) the owner knew as well as marketed the business to find other buyers. In this case, my fee structure would be different to reflect the additional services provided to find and qualify other buyers.
You need to clearly define the services you need from a Broker so they can propose a contract and fee structure that’s fair. You may find some Brokers are more flexible than others in how much they will customize a contract.
I hope this helps.
This is a relatively common question. Most business owners do not have an accurate understanding of the value of their business. Without that knowledge it is difficult to have a negotiation.
Also, it is my experience that these casual suggestions of an offer are usually not followed up with a real Letter of Intent and deposit.
When these supposed offers fall through having a business broker working with you allows you to truly test the market.
The due diligence process can be burdensome. A business broker can oversee the process providing a buffer for the requests.
Finally, an attorney is an expensive resource that can exceed the cost of the business broker if they are asked to manage the process.
Great summary from a veteran M&A lawyer, turned niche advisor to foreign firms entering the US market. A foreign public company has now engaged me to find and negotiate asset acquisitions for them in the U.S. Licensing questions aside, what compensation formula is typical on the buy side for locate, vet, negotiate, and close services working in concert with foreign counsel, local counsel, CPAs, etc. where hourly fees will be credited against % fee if the deal closes?
What type of assets are they looking to acquire? We may be able to help.
Hi Holly –
I am in the process of making an introduction for a large investment group to a potential partner who share the same goals in a large MA push to buy up multiple businesses in a target industry. Each will bring what the other is lacking. It is an introduction that will allow for both sides to reach their goal quickly. I value this as a key introduction. The capital currently raised to obtain these businesses is over $300mm while more is actively being raised. Which I have no part in that aspect. I am working up an agreement to be paid a finders or facilitation/consulting fee. I want to make sure I do not cross any lines legally with the SEC as I am not a licensed broker. I just happened to have this business connection on both sides. What do you recommend is the best structure for this fee. Also, I was thinking of 2-3% based on purchase price of these business for 2 years as they will be obtaining from individual sellers and this will be ongoing. Am on the right track with my assessment of the fee?
I am connecting an investor with a group that plans to build a luxury RV resort. The project will run $2-4m depending on details that we have yet to finalize. I do not have a brokerage license or any formal licensing or training at all for that matter. I gather from your article and the comments combined that 1-3% commission is typical for an introduction of this kind, but without a formal background, I don’t think I can demand too much. I guess my question is twofold: 1) if I go with the low end figure of 1%, do you think that would be fair? I plan to play a part in prepping the investor deck and overall pitch as well. 2) How can I legally get my compensation put in a contract so I can avoid SEC harassment?
Hi Creighton,
It’s very difficult to assess what’s fair in terms of the amount that is paid for your work. Only the persons paying you can tell you what they feel is fair.
That said, if you are searching for accredited investors, that takes a lot of work, time and expertise. And you should be very careful to be licensed to do so. I don’t want you to get into trouble!
Hi Sofia,
What you are proposing is to be paid by a Private Equity Group (aka a PEG) a fee for closed deals in the amount of 2-to-3% of the purchase price.
I believe it may be helpful if I explain how PEGs are compensated. PEGs earn income, typically in the form of a management fee, which is somewhere in the 2-to-3% range. They raise capital from private investors and in exchange for their work acquiring and managing businesses, they are paid their management fee.
So, if the PEG agreed to pay you for an introduction, the fee you are proposing would equal (or exceed) their management fee income. I think you’d agree, this scenario is unlikely.
If you are a registered business broker (U.S. SEC registered), and you represent an acquirer, then you could be paid a fee for finding a business to buy. In that case, the fee would be paid by the acquirer.
Alternatively, if you are able to add more value than an introduction of the parties, a PEG may hire you as and employee or under a venture partner agreement/arrangement to actively identify, pursue and close targeted businesses. Typically these arrangements are made with industry experts, former business owners who’ve successfully exited their business, etc.
I realize this may not be what you were hoping to learn. Albeit, I hope it is helpful to you Sofia.
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.
Charles:
We typically negotiate fees based on how easy it will be to sell the company. If management is great, margins are expanding, there is no customer concentration and books are really clean, we charge a lower fee as it will be VERY EASY to get lots of buyers. If we have a similar size business with a 30% customer, the owner retiring without clear successor, we may charge double the fee than in the first scenario as it will be a much more difficult engagement. Lastly, there is a number that would be considered based or market for those dynamics. We typically charge a lower fee for this base level and then a much higher fee for the sales consideration above this level to keep our interests aligned well with our client. After all, it’s the last million dollars of consideration that is the toughest. It also makes for really happy clients when we exceed their expectations and get them much more than they anticipated.
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.
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.
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
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.
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?
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…