Double Lehman Explained

How M&A intermediaries get compensated

Almost every seller wants to know what our fee structure is before deciding to put a business on sale. Some of our larger clients are immediately familiar with the Double Lehman structure we use but some others have never heard of this fee structure before. Some of the larger companies have heard of the “Lehman Formula” but not the “Double Lehman”. First a brief history of “Lehman Formula”: Lehman Formula is a compensation formula developed by Lehman Brothers many decades back for investment banking services and is structured is as follows:

–       5% of the first million dollars involved in the transaction

–       4% of the second million

–       3% of the third million

–       2% of the fourth million

–       1% of everything thereafter

This formula suggests that a seller would pay an intermediary a fee of $150 thousand on the first $5 million of transaction value. Thereafter, the formula calls for an additional 1% of any value in excess of $5 million. According to the Lehman Formula, a transaction value of $100 million would generate a transaction fee of $1.1 million, or 1.1% of value. Over the last few decades, as inflation changed the size of the deals and as the complexity of the deals grew, this fee structure has evolved. In modern investment banking transactions, this fee structure is somewhat modified and goes along with upfront fees, retainers, hourly fee and other fee to compensate for the expenses in the transaction.  

For large deals, especially the ones in hundreds of millions of dollars, the Lehman Formula provides large fees and there are several national M&A firms such as Goldman Sachs, Merrill Lynch who compete to win these deals. These deals are highly customized and compensation for the M&A specialists is tailored per the objective of the deal.

On the other end of the transaction sizes, business brokers typically charge 12% of the transaction proceeds for business under $500,000 and 10% of the transaction proceeds for businesses over $500,000. Mid market M&A specialists have a challenge in the sense that the work of finding qualified buyers and closing smaller deals can be as or more difficult than for larger deals. Working at the compensation level implied by Lehman is untenable given the complexity and work required of these small deals. However, charging clients at 10% level as business brokers charge can be detrimental to the interest of the client selling his/her multi-million dollar business. Double Lehman is the compensation structure designed by M&A specialists to solve this problem. Double Lehman is a variation on the Lehman Formula to bridge the gap between the very small (less than $1 million) and very large (greater than $100 million) deals.

Under Double Lehman, the M&A specialist fee is structured is as follows:

–       10% of the first million dollars involved in the transaction

–       8% of the second million

–       6% of the third million

–       4% of the fourth million

–       2% of everything thereafter

The Double Lehman provides for a transaction fee of $300,000 of the first $5 million of the transaction value. The fee on a $20 million deal would be $600,000 (3% of value).

Bottom Line: The Double Lehman is a convenient way to begin discussions regarding M&A specialist compensation for selling mid-market companies. The formula provides a structured means of discussing fees and facilitating agreement between sellers and intermediaries. For smaller deals, this fee structure is significantly superior to what business brokers charge. For larger deals (greater than $10 million), the fee structure is more likely to be a combination of upfront fee and success fee and every deal is negotiated. The seller and the M&A specialist can work together to create win-win deals.                        

Leave a Reply

You must be logged in to post a comment.