Guide
The Lehman formula, and why the Double Lehman replaced it
Updated
The scale has a name, a shape and no legal force. Understanding all three is the difference between negotiating a fee and accepting one.
How the scale works
The Lehman scale is a marginal scale, not a single percentage. Each tranche of consideration attracts its own rate, exactly like an income tax band. Classic Lehman charges 5% of the first £1m, 4% of the second, 3% of the third, 2% of the fourth and 1% of everything above £4m. Double Lehman doubles every step: 10, 8, 6, 4 and 2.
That structure is why the headline percentage falls as the deal grows. On the Double Lehman scale a £1m sale costs 10% of the price, while a £50m sale costs 2.4%: the same rates, applied to a much larger balance sitting in the bottom tranche.
| Tranche of consideration | Rate | Fee |
|---|---|---|
| First £1,000,000 | 10% | £100,000 |
| Second £1,000,000 | 8% | £80,000 |
| Third £1,000,000 | 6% | £60,000 |
| Fourth £1,000,000 | 4% | £40,000 |
| Balance above £4,000,000 (£1,000,000) | 2% | £20,000 |
| Total | 6% effective | £300,000 |
Where the name comes from, and what it is not
The scale takes its name from the investment bank that popularised it in the United States decades ago. It has been in continuous circulation ever since, which is precisely the problem: the tranche boundaries were set when £1m was a large number and were never indexed. Doubling the rates was the market's rough correction, and on smaller mandates advisors now commonly quote a flat percentage or a fixed fee instead.
This is a convention, not a rule. No UK regulator and no professional body publishes an M&A advisory fee scale. Anyone who tells you the Lehman scale is the standard is describing a habit, not a requirement, and habits are negotiable.
What to negotiate, in order
- The definition of consideration. Whether debt, cash, property, earn-out and rolled equity count is worth more than a point on the rate. Get the definition before you argue about percentages.
- The minimum fee. On any deal under about £2m the floor, not the scale, is usually what you pay. Ask what the fee is if the business sells for less than expected.
- Incentive above target. A higher rate on consideration above an agreed number aligns the advisor with a better price. It costs you nothing if the number is not achieved.
- How earn-out consideration is charged. Fees on deferred consideration should fall due when the money does, not at completion.
- Who pays on an aborted deal. Abort fees, expenses and the tail all belong in this conversation.