What is the Lehman formula, and how is it used in M&A fees today?
The Lehman formula is a sliding scale for M&A success fees: 5% of the first $1 million of transaction value, 4% of the second million, 3% of the third, 2% of the fourth and 1% of everything above. Variants such as the double Lehman raise the rates, and the fee actually owed is whatever the engagement letter says.
The Lehman formula in one sentence
The Lehman formula is a tiered scale for calculating an investment banker's or M&A advisor's success fee, in which the percentage charged falls as transaction value rises. In its original form it charges 5% of the first $1 million, 4% of the second million, 3% of the third, 2% of the fourth and 1% of everything above $4 million.
The scale is commonly attributed to the investment bank Lehman Brothers. No regulator or standards body defines it, and this page cites no primary source for the rates: they are the version most fee guides describe. Today it works mostly as a reference point: engagement letters cite it, modify it or replace it, and the fee a client owes is whatever its own engagement letter says.
How the calculation works
- Agree in the engagement letter what counts as transaction value: cash at closing, assumed debt, seller notes, earnouts or escrow releases.
- Split that value into bands: the first $1 million, the second, the third, the fourth and the remainder.
- Multiply each band by its rate and add the results.
- Compare the total with any minimum fee, then apply any retainer credit the letter allows.
Illustrative arithmetic only, not a fee quote:
| Transaction value | Original Lehman fee | Effective rate | Double Lehman fee | Effective rate |
|---|---|---|---|---|
| $2 million | $90,000 | 4.5% | $180,000 | 9.0% |
| $5 million | $150,000 | 3.0% | $300,000 | 6.0% |
| $10 million | $200,000 | 2.0% | $400,000 | 4.0% |
| $20 million | $300,000 | 1.5% | $600,000 | 3.0% |
The effective rate falls fast as deals grow. On a lower-middle-market sale, the original scale can produce a fee that does not cover months of preparation, marketing and negotiation, which is the main reason variants and minimum fees exist.
Original, double and modern Lehman compared
| Variant | How the tiers work | Where it tends to come up |
|---|---|---|
| Original Lehman | 5-4-3-2-1 on successive $1 million bands | Textbook definitions and finder negotiations |
| Double Lehman | 10-8-6-4-2 on the same bands, twice the original | Smaller deals where the original scale yields too little |
| Modern Lehman | No single definition; usually larger bands, higher rates or a minimum fee | Negotiated lower-middle-market engagement letters |
| Flat fee with accelerator | One percentage, sometimes rising above a target price | Owners who want to reward a higher sale price |
Treat the double and modern rows as conventions that vary by advisor. When someone quotes modern Lehman, ask for the actual bands and rates in writing. The label describes a family of scales, not a fixed schedule.
Lehman formula vs similar fee terms
| Term | What it pays for | How it is set | Who pays |
|---|---|---|---|
| Lehman-style success fee | Running a sale or acquisition to closing | Tiered percentages of transaction value | The advisor's client |
| Retainer | Advisor time and preparation | Monthly or upfront amount, sometimes credited against the success fee | The advisor's client |
| Finder's fee | Introducing a counterparty to a transaction | Negotiated; sometimes benchmarked against a Lehman scale | The party that benefits |
| Referral fee | Sending a client to another provider | Negotiated share of the provider's fee, or a flat amount | The receiving provider |
| SourceX partner reward | Introducing a company that licenses its data | 25% of eligible platform fees SourceX collects, capped at $100,000 per referred company | SourceX, from its own fee |
Why the Lehman formula matters to referral partners
People who introduce deals sometimes ask for a Lehman fee as shorthand for being paid fairly. Keep two things in mind. A Lehman scale prices the work of running a transaction, not the act of introducing one, so a pure introducer rarely has a basis to claim it. And paid deal introductions raise their own questions, covered in the guides on the typical finder's fee percentage and M&A referral fees.
A SourceX data-licensing reward is built differently by design. It is not a percentage of the license price or of the company's value. Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company. It becomes payable only after the buyer pays and SourceX receives its fee, and it is never deducted from what the company receives. The Lehman formula vs percentage-of-fee referral rewards comparison sets the two side by side, and the referral earnings calculator shows how the reward formula works.
This is general information, not legal, tax or financial advice.
Related terms
- Success fee, retainer, minimum fee and tail: the other parts of an advisor's engagement economics, explained in how M&A advisors get paid.
- Transaction value: the defined base the scale applies to; its definition often matters more than the rates.
- Accelerator: a higher rate on the portion of price above an agreed target.
- Referral partner: someone paid for an introduction rather than for running a deal; see how this works for M&A advisors.
Next step
If you advise owners and meet companies with years of operating records, register as a partner and introduce them for data licensing; the reward follows the program's published formula, not a Lehman scale.
- Step 1Share your linkSend your personal link to a company you know.
- Step 2Company appliesThe company applies itself at /apply.
- Step 3Buyer selects and paysThe buyer selects and pays for the data and SourceX receives its fee.
- Step 4You get your rewardYour share of SourceX fees becomes payable.
Common questions
Is the Lehman formula still used in M&A engagement letters?
It survives mainly as a reference point and a starting template. Advisors and clients still mention it, but engagement letters for lower-middle-market deals are negotiated and frequently use a flat percentage with a minimum fee, a modified tiered scale, or an accelerator above a target price. The fee that applies is always the one written in the signed engagement letter.
Why would an advisor ask for double Lehman instead of the original?
On smaller transactions the original 5-4-3-2-1 scale can produce a fee too small to cover the months of work involved in preparing materials, contacting buyers and negotiating terms. Doubling each tier is a simple way to keep the familiar structure while raising the total. Owners compare it with flat-fee and minimum-fee alternatives before agreeing.
What counts as transaction value in a Lehman calculation?
Whatever the engagement letter defines. Definitions commonly reach beyond cash at closing to include assumed debt, seller notes, earnouts and escrowed amounts, and they often specify that fees on deferred or contingent amounts are paid only when the client actually receives them. Owners should read this definition as carefully as the percentage rates, because it changes the base for every tier.
Can I use a Lehman formula calculator to estimate a SourceX referral reward?
No. A Lehman calculator applies tiered percentages to a transaction value, while a SourceX reward is a share of the eligible platform fees SourceX actually collects from a referred company's licensing deals, capped per referred company and payable only after the buyer pays. The SourceX referral earnings calculator shows how that formula works instead.
Related pages
- What is a typical finder's fee percentage for introducing a business deal?
- M&A referral fees: how sell-side advisors pay referral sources, and who can accept them
- Lehman formula vs referral fee: how an M&A success fee compares with a SourceX reward
- Referral Earnings Calculator
- How do M&A advisors get paid: retainers, success fees, minimums and tails
- Referral opportunities for M&A advisors
Free resources
- PDF bank statement to CSV converter — Turn Chase, Bank of America or Wells Fargo PDF statements into CSV, privately in your browser.
- Client data licensing eligibility checker — A transparent preliminary screen for one company.
- Enterprise value calculator — Enterprise value from equity value, debt and cash.
- All free tools · MCP resource center
By SourceX Partnerships Team · Published 2026-10-09 · Updated 2026-10-09
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