Guide
The Lehman formula, and why Double Lehman replaced it
Updated
The Lehman formula is the oldest fee convention in American M&A and it was designed for deals far larger than the ones it is now quoted on. Understanding why it got doubled tells you most of what you need to know about how sell-side fees work below $50 million.
Talk to a specialist Lehman and Double Lehman at your deal size, with the minimum fee, the retainer credit and the tail that decide what you actually pay.
The original ladder
Five percent of the first million of deal value, four percent of the second, three of the third, two of the fourth and one percent of everything above. It is a ladder, not a flat rate, so the effective percentage falls continuously as the deal grows: 5.00% on a $1M transaction, 3.00% at $5M, 2.00% at $10M and 1.40% at $25M.
That declining curve is the point. A larger deal is not proportionally more work, and a scale that stayed flat would price a $25M mandate at $1.25M for a process not much longer than a $5M one.
Why it was doubled
The scale was written when a million dollars was a large transaction. Applied unchanged to a modern $2M business sale it produces a $90,000 fee for a full sell-side process: buyer research, an information memorandum, management meetings, several rounds of bids and months of diligence support. No firm can staff that properly at that price.
So the lower middle market moved to Double Lehman, which is the same ladder at ten, eight, six, four and two percent. It is exactly twice the original at every deal size, which is why an advisor quoting 'the Lehman scale' without saying which one has told you almost nothing.
Where both stop applying
Above roughly $25M, neither ladder is what firms actually quote. Fees at that size are negotiated as a bespoke scale, often with a lower base percentage and an incentive tier that pays a higher rate on value above a target price. That structure aligns the advisor with the outcome in a way a flat ladder cannot.
Below about $2M, the ladder is usually irrelevant for the opposite reason: a minimum fee has taken over, and the scale is decoration.
What to ask when you are quoted a scale
Which ladder, on what value, and with what minimum. The second of those three catches people out: a fee on enterprise value and a fee on equity value are different numbers whenever the business carries debt or surplus cash, and the engagement letter should say which.
Then ask what happens to the fee if the deal is restructured from an asset sale to a stock sale. That question is about tax on the face of it and about the advisor's own regulatory position underneath, because brokering a stock sale is a securities transaction and brokering an asset sale is not.