A tiered success fee, worked tier by tier, and the one sentence in the engagement letter that moves it by a quarter.
The Lehman formula charges 5 per cent of the first million of transaction value, 4 per cent of the second, 3 per cent of the third, 2 per cent of the fourth and 1 per cent of everything above. On an illustrative 40.0 million deal that is 500,000, or 1.25 per cent; the Double Lehman scale most mid-market advisers now quote gives 1,000,000, or 2.50 per cent. The definition of transaction value moves the fee almost as much as the scale: on equity value instead of enterprise value the Double Lehman fee falls by 240,000.
Worked in full in Mergers and Acquisitions by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Success fees in mid-market M&A are rarely a flat percentage. They are tiered, so the rate falls as the deal grows, and the engagement letter fixes three things that matter as much as the rates: what counts as transaction value, whether the retainer is credited, and the minimum fee. Each is a calculation, and each is negotiable before the mandate is signed, not after.
| Input | Value |
|---|---|
| Enterprise value of the deal | 40,000,000 |
| Debt assumed by the buyer | 12,000,000 |
| Equity value paid for the shares | 28,000,000 |
| Monthly retainer, months paid | 15,000 × 6 |
| Minimum success fee | 750,000 |
Fee = Σ (portion of value in each tier × that tier's rate)
In Excel, with value in B1: =MIN(B1,1E6)*5%+MAX(0,MIN(B1,2E6)-1E6)*4%+MAX(0,MIN(B1,3E6)-2E6)*3%+MAX(0,MIN(B1,4E6)-3E6)*2%+MAX(0,B1-4E6)*1%. Double the rates for Double Lehman.
| Tier | Lehman | Double Lehman |
|---|---|---|
| First million, 5.0% / 10.0% | 50,000 | 100,000 |
| Second million, 4.0% / 8.0% | 40,000 | 80,000 |
| Third million, 3.0% / 6.0% | 30,000 | 60,000 |
| Fourth million, 2.0% / 4.0% | 20,000 | 40,000 |
| Remaining 36 million, 1.0% / 2.0% | 360,000 | 720,000 |
| Success fee | 500,000 | 1,000,000 |
The original scale was set when a million was a large deal; its first four tiers now add up to only 140,000 (280,000 doubled), and almost everything is charged at the bottom rate. That is why most advisers no longer quote the classic scale. A common modern alternative uses wider tiers, for instance 3.0 per cent to 10 million, 2.0 per cent from 10 to 25 million and 1.5 per cent above. On the same deal it gives 300,000 + 300,000 + 225,000 = 825,000, or 2.06 per cent. These scales are illustrative: the rates are negotiated mandate by mandate.
The fee is a percentage of a number, and the engagement letter defines it. If transaction value is the enterprise value, including the 12.0 million of debt the buyer assumes or repays, the Double Lehman fee is 1,000,000. If it is the equity value of 28.0 million, the fee is 760,000, 1.90 per cent of enterprise value. The 240,000 difference is decided by one sentence. Sellers with leveraged businesses should expect the adviser to ask for enterprise value, and earn-outs and deferred consideration to be included as and when paid: 8.0 million of earn-out paid later adds 160,000 at the 2 per cent bottom tier.
Six months of retainer at 15,000 is 90,000. If it is credited against the success fee, as sellers usually ask, the fee paid at completion is 910,000 rather than 1,000,000. The minimum fee of 750,000 is the other floor: under Double Lehman it binds for any deal below 31,500,000 of value, so a deal that closes lower costs the seller the minimum, not the formula.
| Value, million | Lehman | % | Double Lehman | % | Modern scale | % |
|---|---|---|---|---|---|---|
| 5 | 150,000 | 3.00% | 300,000 | 6.00% | 150,000 | 3.00% |
| 10 | 200,000 | 2.00% | 400,000 | 4.00% | 300,000 | 3.00% |
| 25 | 350,000 | 1.40% | 700,000 | 2.80% | 600,000 | 2.40% |
| 40 | 500,000 | 1.25% | 1,000,000 | 2.50% | 825,000 | 2.06% |
| 100 | 1,100,000 | 1.10% | 2,200,000 | 2.20% | 1,725,000 | 1.73% |
| 250 | 2,600,000 | 1.04% | 5,200,000 | 2.08% | 3,975,000 | 1.59% |
The effective rate of any Lehman-type scale converges on its bottom tier as the deal grows: 1 per cent for Lehman, 2 per cent for Double Lehman. On large deals the negotiation is really about that bottom rate and about incentive tiers, a higher rate on value above an agreed target price, which align the adviser with the price rather than with mere completion.
Work the fee tier by tier, then apply the engagement letter's definition of transaction value, the retainer credit and the minimum. On 40.0 million, Lehman gives 500,000, Double Lehman 1,000,000 and a modern scale 825,000; defining value as equity takes 240,000 off. Fees are one of the lines that separate the prices of one deal, which is the subject of the free workbooks for Mergers and Acquisitions; the buyer's side of the same price is in the EV/EBITDA multiple paid in an acquisition.
The Lehman scale with every rate doubled: 10 per cent of the first million, 8 of the second, 6 of the third, 4 of the fourth and 2 per cent of the rest. On a 40.0 million deal it gives 1,000,000, or 2.50 per cent, and its effective rate falls towards 2 per cent as deals grow: 2.20 per cent at 100 million.
Whatever the engagement letter says, which is why the definition is negotiated. On a 40.0 million enterprise value with 12.0 million of debt, Double Lehman charges 1,000,000 on enterprise value and 760,000 on the 28.0 million equity value. Earn-outs are usually included when paid: 8.0 million adds 160,000 at the bottom tier.
The seller pays the higher of the two. With a 750,000 minimum, Double Lehman produces less than the floor for any deal below 31,500,000 of value, so the minimum, not the formula, sets the fee on smaller outcomes. A retainer credit, 90,000 here, then reduces whichever amount is payable.
This article is one calculation from Mergers and Acquisitions. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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