Lehman Formula Calculator

Our Lehman Formula Calculator helps investment bankers, business owners, and M&A professionals quickly determine advisory fees for selling a company or raising capital.

What is the Lehman Formula?

The Lehman Formula (also known as the Lehman Scale) is a fee structure traditionally used by investment banks and business brokers to calculate their compensation for arranging business transactions such as mergers, acquisitions, or capital raising. Named after the now-defunct Lehman Brothers investment bank, this tiered fee structure has been a standard in the investment banking industry for decades.

Understanding the Traditional Lehman Scale

The classic Lehman Formula uses a declining percentage scale based on the transaction value:

• 5% of the first $1 million
• 4% of the second $1 million
• 3% of the third $1 million
• 2% of the fourth $1 million
• 1% of everything above $4 million

This structure recognizes that while larger deals require more work, the effort doesn't increase proportionally with the deal size. The formula ensures that advisors are fairly compensated while keeping fees reasonable for larger transactions.

Modern Variations of the Lehman Formula

In today's market, the traditional Lehman Formula has evolved to reflect the reality of larger transaction sizes. Common variations include:

Double Lehman

• Doubles each percentage (10%, 8%, 6%, 4%, 2%)
• Used for more complex transactions requiring additional work

Modified Lehman

• Adjusts the tier thresholds to higher values
• For example: 5% of first $10M, 4% of next $10M, etc.

Flat Percentage with Minimum

• Simplified structure with a flat percentage (often 1-2%)
• Includes a minimum fee to ensure adequate compensation for smaller deals

When to Use the Lehman Formula

The Lehman Formula is typically applied in:

1. Business Sales: When selling a company or business division
2. Capital Raising: For securing debt or equity financing
3. Mergers & Acquisitions: For advisory services in M&A transactions
4. Joint Ventures: When arranging strategic partnerships

Benefits of Using Our Calculator

Our Lehman Formula Calculator offers several advantages:

• Transparency: Clearly see how fees are calculated across different tiers
• Customization: Adjust the formula to match your specific agreement
• Negotiation Tool: Use as a reference point when discussing fees with advisors
• Planning: Accurately budget for transaction costs when selling a business

How to Use This Calculator

1. Enter Deal Value: Input the total transaction value
2. Review Standard Calculation: See the fee breakdown using the traditional Lehman Formula
3. Customize (Optional): Toggle the custom tiers option to adjust percentages and thresholds
4. Analyze Results: Review the total fee and effective percentage rate

Considerations When Negotiating Fees

When discussing advisory fees using the Lehman Formula, consider:

• Transaction Complexity: More complex deals may justify higher percentages
• Expected Work: The anticipated level of effort required
• Market Standards: Current industry norms for similar transactions
• Minimum Fees: Ensure the total compensation adequately covers the advisor's work
• Success Fees vs. Retainers: How upfront retainers might offset success fees

Conclusion

The Lehman Formula provides a time-tested framework for calculating investment banking and business brokerage fees. While the traditional scale remains relevant, modern adaptations reflect changing market conditions and deal sizes. Our calculator helps you quickly determine appropriate fees while providing the flexibility to customize the formula to your specific situation.

Whether you're a business owner planning to sell, an advisor structuring your fee agreement, or an M&A professional, this calculator offers a valuable tool for fee transparency and planning.