Introduction to The Lehman Formula

Joshua Hawley

Dec 15th, 2024

The Double Lehman Formula, also known as the Modern Lehman Formula, is a method used to calculate the compensation or success fee for M&A advisors, deal brokers, and investment bankers. It is a variation of the original Lehman Formula, which was developed in the 1970s.

Double Lehman Formula Structure: The Double Lehman Formula typically follows a tiered structure, where the percentage of the fee decreases as the transaction value increases. The formula usually applies to transactions above $1 million and follows a structure such as: 10% of the first $1 million, 9% of the second $1 million, 8% of the third $1 million, and so on.

Comparison to Original Lehman Formula: The Double Lehman Formula is an adjustment to the original Lehman Formula, which had a tiered structure of 5-4-3-2-1. The Double Lehman Formula doubles the percentages, making it more relevant to today's M&A processes and accounting for inflation.

Usage in M&A Transactions: The Double Lehman Formula is commonly used in middle market transactions, where the complexity and closing periods are typically longer. It is also used in sell-side agreements, where a broker assists a business owner in selling their business.

Negotiation of Fees: While the Double Lehman Formula provides a standard method for calculating success fees, the fees can be negotiated on a case-by-case basis. Some M&A advisors may be willing to adjust their fees, while others may not.

Example of Double Lehman Formula on a Lower Middle Market Debt Transaction

Let's consider a lower middle market debt transaction with a total debt value of $10 million. We will apply the Double Lehman Formula to calculate the success fee for the transaction advisor.

Transaction Value: $10,000,000

Double Lehman Formula:

+ 5% of the first $1 million = $50,000

+ 4% of the next $1 million = $40,000

+ 3% of the next $1 million = $30,000

+ 2% of the next $1 million = $20,000

+ 1% of the remaining $6 million = $60,000

Calculation of Success Fee

1. $50,000 (5% of $1 million) + $40,000 (4% of $1 million) + $30,000 (3% of $1 million) + $20,000 (2% of $1 million) = $140,000

2. $60,000 (1% of $6 million)

3. Total Success Fee = $140,000 + $60,000 = **$200,000

In this example, the advisor would earn a success fee of $200,000 on a $10 million debt transaction, using the Double Lehman Formula.

Note: The Double Lehman Formula is just one method of calculating success fees, and the actual fee structure may vary depending on the specific agreement between the advisor and the client. Additionally, other factors such as the complexity of the transaction, the level of competition, and the advisor's expertise may also influence the final fee.

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