Lehman Formula: How M&A Advisory Fees Are Calculated
The Lehman formula charges $300,000 on a $20M sale and double Lehman $600,000. For owners and CFOs: the retainer, minimum, fee base and tail around it.
Five falling rates on $1M slices give $300,000 on a $20M sale, an effective 1.5%, with 1% on every dollar above $4M.
10%, 8%, 6%, 4% and 2% give $600,000 on a $20M sale; the labels vary, so write the percentages into the letter.
An illustrative $500,000 minimum is an effective 5% of a $10M sale, whatever the scale produces.
Debt, earn-outs, escrow and rollover equity sit inside or outside transaction value; a fee on cash received protects the seller.
Limit the tail to a named list and confirm the advisor's US registration or exemption before the letter is signed.
The Lehman formula sets an M&A success fee in steps: 5% of the first $1M of transaction value, 4% of the second, 3% of the third, 2% of the fourth and 1% of everything above $4M. On a $20M sale that's $300,000, or 1.5%. Double Lehman doubles each step and charges $600,000.
The engagement letter around the scale can move M&A advisory fees further than the scale itself does.
spectup's own fee on an M&A mandate is a monthly retainer plus a transaction fee capped in the mandate; both figures are in writing after the first call.
| Series | Sale price | Value |
|---|---|---|
| Double Lehman | $0 | $0 |
| Double Lehman | $1M | $100,000 |
| Double Lehman | $2M | $180,000 |
| Double Lehman | $3M | $240,000 |
| Double Lehman | $4M | $280,000 |
| Double Lehman | $5M | $300,000 |
| Double Lehman | $10M | $400,000 |
| Double Lehman | $20M | $600,000 |
| Lehman | $0 | $0 |
| Lehman | $1M | $50,000 |
| Lehman | $2M | $90,000 |
| Lehman | $3M | $120,000 |
| Lehman | $4M | $140,000 |
| Lehman | $5M | $150,000 |
| Lehman | $10M | $200,000 |
| Lehman | $20M | $300,000 |
What is the Lehman formula?
Five falling rates on five slices of the price make up the whole scale. The Lehman scale charges a lower percentage on each successive $1M of transaction value:
5% of the first $1M
4% of the second $1M
3% of the third $1M
2% of the fourth $1M
1% of everything above $4M
On a $20M sale the first $4M produces $50,000 + $40,000 + $30,000 + $20,000 = $140,000, and the remaining $16M at 1% adds $160,000. The fee is $300,000, an effective rate of 1.5%.
| Step | Change | Running total |
|---|---|---|
| First $1M at 5% | $50,000 | |
| Second $1M at 4% | +$40,000 | $90,000 |
| Third $1M at 3% | +$30,000 | $120,000 |
| Fourth $1M at 2% | +$20,000 | $140,000 |
| First $4M | $140,000 | |
| Other $16M at 1% | +$160,000 | $300,000 |
| Lehman fee | $300,000 |
Two rates matter in every letter. The effective rate is the total fee divided by the price, and the marginal rate is what the next $1M of price earns the advisor. Owners compare the first; the second is the advisor's incentive.
A Lehman agreement is an engagement letter whose success fee uses this scale.
On an M&A advisory mandate the advisor runs a sale or a purchase for one side, from the first materials to the signed terms. The letter for that work pairs the Lehman formula success fee with a monthly retainer, often a minimum fee and a tail, and those terms decide a large share of what the seller pays.
What is the double Lehman formula?
Double Lehman takes the same five slices and doubles every rate:
10% of the first $1M
8% of the second $1M
6% of the third $1M
4% of the fourth $1M
2% of everything above $4M
On the same $20M sale the first $4M produces $280,000 and the remaining $16M at 2% adds $320,000. The fee is $600,000, an effective 3.0%.
The names aren't standard, and that's the practical problem: "double", "modern" and "modified" Lehman can mean different ladders in different letters. One consulting agreement filed with the SEC in 2026 defines "Lehman (N)" as the standard Lehman scale at N times its rates, spells out Lehman (2.0) as 10%, 8%, 6%, 4% and 2% on $1M slices, and sets its M&A fee at Lehman (2.0).
Write the five percentages and the slice size into the letter, never only the word "double".
Lehman formula and double Lehman fees at five deal sizes
The effective rate halves between a $5M and a $20M sale, and it keeps falling. The chart below is the arithmetic of both scales at five sale prices from $5M to $100M, with both fees beside each price.
| Row | Lehman | Double Lehman |
|---|---|---|
| $5M sale ($150,000 / $300,000) | 3.0% | 6.0% |
| $10M sale ($200,000 / $400,000) | 2.0% | 4.0% |
| $20M sale ($300,000 / $600,000) | 1.5% | 3.0% |
| $50M sale ($600,000 / $1.2M) | 1.2% | 2.4% |
| $100M sale ($1.1M / $2.2M) | 1.1% | 2.2% |
The effective rate falls so fast because only the first $4M carries the high rates. On a $20M sale, 80% of the price sits above $4M, where the rate is 1%, so every extra $1M adds $10,000 under the original scale and $20,000 under double Lehman.
That's the weakness of both scales as an incentive: they pay for closing far more than for pushing the price.
The same rule works as a Lehman formula calculator for any price above $4M: take $140,000 plus 1% of the amount above $4M. As a double Lehman calculator, double both figures.
Modified and reverse Lehman: larger slices, flat rates and accelerators
The modified Lehman formula has no single definition, so the letter has to spell it out. Four versions appear in letters:
Larger slices. The stepped rates apply to $2M, $5M or $10M bands instead of $1M, which lifts the fee on mid-sized sales.
A flat base rate above a threshold. A stepped scale up to a set price, then one percentage on everything above it.
A flat percentage of the whole price. Easy to calculate, and the effective rate equals the headline rate.
An accelerator. A higher rate on value above an agreed target price, sometimes called the reverse Lehman formula because the rate rises with the price instead of falling.
An illustrative accelerator, not a market rate: 2% of the price plus 5% of anything above $40M. On a $45M sale that's $900,000 plus $250,000, or $1,150,000, and the advisor's marginal rate above the target is 7%.
An accelerator aligns the advisor better than a lower headline rate does, because the advisor earns its top rate only when the seller is paid more. Set at a realistic target, it pays for the price a live second bidder forces out of the winner.
The four other terms in M&A advisory fees
The success fee is one of five money terms in an engagement letter, and on smaller sales the other four decide the bill. Lower mid-market M&A advisory fees and investment banking fees on larger deals use the same five parts:
Retainer. A monthly or one-off payment for the preparation, materials and outreach that happen months before a bid. The letter says whether the retainer credit against the success fee is full, partial or nil.
Minimum fee. A floor under the success fee, payable whatever the scale produces.
Expenses. Travel, data room and third-party costs, usually reimbursed and worth capping.
Tail and exclusivity. Exclusivity bars the seller from appointing a second advisor, and the tail keeps the fee payable for a period after the engagement ends.
On a smaller sale the minimum fee sets the bill: an illustrative $500,000 minimum on a $10M sale is an effective 5%, whatever the scale says.
The retainer credit is the cheapest term to win. An illustrative retainer of $15,000 a month for six months is $90,000, and credited in full it saves the seller more than cutting double Lehman's 2% rate above $4M to 1.5% on any sale under $22M.
The tail can make the fee payable after the engagement has ended. In Seymour Pierce v Grandtop, the High Court held a £2.2M success fee payable under a 12-month tail, although the advisor had stopped working on the football club takeover that completed with another advisor's help.
Each side pays its own advisor, and the seller's advisor is usually paid out of the sale proceeds. When spectup ran the 2026 sale of a $10M US healthcare business to a strategic acquirer, the seller paid our fee. On our sell-side mandates, a company that doesn't sell has paid the retainer and no transaction fee.
What is the success fee calculated on?
Most letters say "transaction value" and define it in a single paragraph a seller skims. On a $12M sale with a 10% earn-out, that paragraph decides whether $1.2M carries a fee at closing or only when it's paid.
Negotiate the definition of transaction value before you negotiate the percentage.
Call it the fee base. Each line of consideration either sits inside it or outside it, and the seller can negotiate every row of this table:
3 columns. Drag the table sideways; the first column stays put.
Item | Usually in the fee base? | What the seller can negotiate |
|---|---|---|
Debt assumed or repaid by the buyer | Yes, if the base is enterprise value | Equity value as the base |
Earn-out | Often, at face value at closing | The fee on each payment as it's received |
Escrow and holdback | Yes | The fee on the held-back part only on release |
Seller note or vendor loan | Usually | The fee as the note is repaid |
Rollover equity | Often | Rollover excluded, since no cash changes hands for it |
Non-cash consideration | Yes, at a value the letter sets | Who values it, and when |
Real estate or sale-leaseback | Depends on the drafting | Property excluded unless the advisor sold it |
An earn-out is the part of the price paid later against targets; rollover equity is the stake the seller keeps in the buyer's vehicle. A letter can charge the fee on an earn-out's face value at closing, so the advisor is paid on 100% of a payment the seller may never receive.
The fee base is agreed in the engagement letter, before the first step of the sell-side process, and it's cheapest to negotiate then. Equity value as the base and payment when received are the two fee-base terms worth spending real negotiating capital on.
Same Lehman formula, two engagement letters: a $12M sale at three prices
Two letters built on the same double Lehman formula can sit $217,200 apart on one sale. The example is illustrative, not a spectup deal, and every number in it follows from these assumptions:
A retainer of $15,000 a month for six months, $90,000 in total.
10% of the price is an earn-out that never pays out, and the escrow is released in full.
Letter A charges the fee on headline value at closing, earn-out included at face, with a $500,000 minimum and no retainer credit.
Letter B charges the fee on consideration received, so the earn-out carries no fee, with no minimum and the retainer credited in full.
| Scenario | Letter A | Letter B | Gap |
|---|---|---|---|
| $9.6M sale | $590,000 | $372,800 | $217,200 |
| $12M sale, expected | $590,000 | $416,000 | $174,000 |
| $14.4M sale | $590,000 | $459,200 | $130,800 |
The gap is $217,200 at $9.6M, $174,000 at the expected $12M and $130,800 at $14.4M. In Letter A the minimum sets the fee at all three prices: double Lehman would produce between $392,000 and $488,000, all below $500,000, so the formula never operates.
So the gap in M&A fees between the two letters comes from three lines of drafting, the fee base, the minimum and the retainer credit, and the scale is in none of them. Letter A also pays the advisor the same $590,000 whether the price falls 20% or rises 20%, the opposite of the incentive a seller wants.
Model your own letter the same way before you sign: the expected price, 20% below and 20% above, with the minimum, any accelerator and the retainer credit in every cell.
How buy-side fees differ from a seller's Lehman scale
On the buy side, M&A fees built on a percentage scale pull the wrong way, because the transaction fee sits on a price the client wants to be low. That pull is why the cap and a walk-away number agreed before any offer matter more than the rate.
The retainer buys a search that may find nothing. A buyer pays spectup a monthly retainer while the search runs and a transaction fee capped in the mandate before any work starts, and in a live process the walk-away number is agreed with the buyer in advance.
A sponsor running a buy-and-build strategy, a series of add-on acquisitions onto one PE platform, wants the cost predictable across a run of small deals. Caps and a fixed fee per completed add-on are two ways to do that.
Does the Lehman formula apply to private placements?
The same 2026 consulting agreement on EDGAR puts its Lehman (2.0) multiple on a "Financial Introduction Success Fee" as well, a fee it ties to "the successful introduction of financial entities".
In a regulated placement the fee is a percentage of capital placed, and in the US who receives it matters as much as the rate. FINRA Rule 2040 bars a member firm from paying compensation to anyone who would have to register as a broker-dealer to receive it, so a registered firm can't share a Lehman fee with an unregistered finder on a US raise.
The federal M&A broker exemption doesn't help a finder either: as Goodwin's note on the exemption puts it, the exemption "does not permit unregistered brokers to identify new sources of capital or otherwise facilitate securities offerings".
A finder quoting a Lehman scale on a US raise without a registration is a reason to end the conversation.
Fund managers face the same fee questions at fund level when they hire a placement agent for private equity.
Can a US advisor charge a success fee without broker registration?
In the US, pay that depends on a sale of shares closing can require registration as a broker-dealer under Section 15 of the Securities Exchange Act, and many private-company sales are share sales. A success fee on a share sale is exactly that kind of pay.
Since 29 March 2023 a federal exemption for M&A brokers has covered the sale of a privately held company, and its dollar thresholds adjust for inflation every five years.
The target qualifies if, in the fiscal year before the broker is engaged, its EBITDA was under $25M or its gross revenues were under $250M, as the statute sets out; either test is enough. The exemption doesn't cover a sale to a passive buyer, and state registration rules still apply.
Confirm the advisor's registration status, or the exemption it relies on, before you sign. If the advisor needed a registration it didn't hold, the success fee itself may be open to challenge after closing.
How spectup runs the fee on an M&A mandate
Our M&A advisory fees have five terms:
One side, one payer. We act for the seller or for the buyer, and the client we act for pays us.
A monthly retainer for the term of the mandate, flat, agreed before work starts. It pays for the desk, the materials and the outreach.
A transaction fee as a percentage of transaction value, capped in the mandate and due at closing, once the funds arrive.
Agreed in writing. Both figures are set in the mandate before work starts.
No mandate on a success fee alone. An advisor paid only on a transaction earns nothing unless one closes, which is pressure to accept a bid 20% below the expected price.
Behind the desk is the network: 440+ direct relationships with acquirers, sponsors and lenders from transactions we closed, 2,500+ investors and LPs we've sat in front of with clients, and the buyer books of 30+ partner firms.
That's the base behind $150M+ M&A advised. For a seller, the process those fees pay for is set out under sell-side M&A advisory.
What to settle before you sign an engagement letter
If I could change one line in a seller's letter, it would be the earn-out: charged at face value at closing, it pays the advisor on money the seller may never see.
Seven terms decide what the Lehman formula will cost you, and each is cheaper to settle before signing than after:
Write the percentages and the slice size into the letter, never only a label such as "double" or "modified".
Price the fee at 20% below, at and 20% above the expected price, with the minimum and any accelerator included.
Define transaction value line by line, with earn-outs and escrow charged when received.
Put the retainer credit in writing: full, partial or none.
Limit the tail to a named list of parties delivered at termination, with no fee after a termination for cause.
Cap expenses, or require approval above a set amount.
Confirm the advisor's registration status, or the exemption it relies on.
Compare M&A fees across advisors on those seven lines, because two letters on the same scale can sit hundreds of thousands of dollars apart.
If you're comparing engagement letters now, a 30-minute call with spectup gets you our retainer and capped transaction fee in writing, set against your transaction size, structure and jurisdictions.
Three conclusions
In the illustrative $12M sale, two letters on the same double Lehman scale sit up to $217,200 apart, and none of that gap comes from the scale itself.
An accelerator pays its higher rate only on price above a realistic target, so the advisor earns more only when the seller does, which a cut in the base rate never achieves.
With no retainer the advisor earns nothing unless a deal closes, so a bid 20% below the expected price still beats no deal for the advisor; a retainer takes that pressure off.
Lehman formula: questions readers ask
7 questions on M&A, answered by Edwin Mik, Partner & Head of IR.
01What is the Lehman formula?
It's a stepped success fee for M&A and capital raising: 5% of the first $1M of transaction value, 4% of the second, 3% of the third, 2% of the fourth and 1% of everything above $4M.
02What is the double Lehman formula?
Double Lehman doubles every rate of the original scale: 10%, 8%, 6%, 4% and 2% on the same $1M slices. On a $20M sale it produces $600,000, an effective 3.0%.
03What is the modern Lehman formula?
It has no fixed meaning. Some fee pages use it for double Lehman, and at least one calculator uses it for a different ladder, so replace the label in the letter with the percentages and the slice size.
04What is the reverse Lehman formula?
It raises the rate as the price rises, usually through an accelerator: a base percentage of the whole price plus a higher rate on any value above an agreed target. It pays the advisor its top rate only when the seller is paid more, which makes it the best-aligned variant for a seller.
05What is M&A advising?
It's running a company sale or purchase for one side, from the first materials to the signed terms, paid for by that side.
06How much does an M&A advisor charge on a $20M sale?
Under the original Lehman scale the success fee is $300,000, or 1.5%; under double Lehman it's $600,000, or 3.0%. Investment banking fees on a sale of this size commonly sit in the low single digits and fall as transaction size rises. M&A fees also include a retainer and often a minimum, and a broad fee base can lift the real cost well above the scale's figure.
07When should an owner or CFO hire an M&A advisor, and how is spectup paid?
Hire one before the first buyer conversation, because the field of buyers and the price tension are set from then on. spectup's M&A advisory acts for one side only and is paid by that side: a monthly retainer while the mandate runs, plus a transaction fee that is a percentage of transaction value, capped in the mandate and paid when the deal closes and the client receives the funds.
