What Is the Lehman Formula?
The Lehman formula is a tiered fee structure originally developed by Lehman Brothers in the 1960s to calculate advisory fees for mergers and acquisitions. The original formula — 5% on the first USD 1 million, declining by 1% for each subsequent million, with 1% on all value above USD 4 million — was designed for deal sizes that were typical in that era. As transaction values grew through the 1980s and 1990s, advisors adapted the formula into scaled variants that remain in use today.
Business owners selling their companies, and management teams evaluating advisory proposals, encounter the Lehman formula when reviewing an engagement letter. Understanding how each variant calculates fees — and what the effective rate works out to for their specific deal size — is essential before signing any advisory mandate.
The Three Lehman Variants
Original Lehman Formula
The original formula was designed for deals in the USD 1–10 million range:
| Transaction Value Tier | Fee Percentage |
|---|---|
| First USD 1 million | 5% |
| Second USD 1 million | 4% |
| Third USD 1 million | 3% |
| Fourth USD 1 million | 2% |
| Everything above USD 4 million | 1% |
Worked example: On a USD 10 million transaction: (1M × 5%) + (1M × 4%) + (1M × 3%) + (1M × 2%) + (6M × 1%) = USD 200,000 — a 2.0% effective rate.
Modified Lehman Formula (Mid-Market Standard)
The modified Lehman scales each bracket to USD 10 million increments, making it practical for current mid-market transactions:
| Transaction Value Tier | Fee Percentage |
|---|---|
| First USD 10 million | 5% |
| USD 10–20 million | 4% |
| USD 20–30 million | 3% |
| USD 30–40 million | 2% |
| Everything above USD 40 million | 1% |
Worked example: On a USD 50 million transaction: (10M × 5%) + (10M × 4%) + (10M × 3%) + (10M × 2%) + (10M × 1%) = USD 1.5 million — a 3.0% effective rate.
According to Corporate Finance Institute, the modified Lehman is the most common fee benchmark for mid-market sell-side mandates in the USD 15 million to USD 100 million range.
Double Lehman Formula
The double Lehman doubles each percentage from the original:
| Transaction Value Tier | Fee Percentage |
|---|---|
| First USD 1 million | 10% |
| Second USD 1 million | 8% |
| Third USD 1 million | 6% |
| Fourth USD 1 million | 4% |
| Everything above USD 4 million | 2% |
Worked example: On a USD 10 million transaction: (1M × 10%) + (1M × 8%) + (1M × 6%) + (1M × 4%) + (6M × 2%) = USD 400,000 — a 4.0% effective rate.
When Each Variant Is Used
| Deal Size | Typical Formula | Notes |
|---|---|---|
| Under USD 10 million | Double Lehman | Lower mid-market; higher effective rates compensate for fixed advisory costs |
| USD 10–50 million | Modified Lehman | Core mid-market benchmark; most commonly referenced in fee negotiations |
| USD 50–200 million | Modified Lehman or flat % | Larger deals often use flat percentages (1.5–3%) for simplicity |
| Above USD 200 million | Flat percentage | Tiered formulas produce high absolute fees; flat rates are standard for large-cap |
The formula matters less than the effective rate. A seller evaluating two proposals should calculate the total fee as a percentage of their expected enterprise value — not compare formula structures in isolation. A modified Lehman at 3.0% effective and a flat fee of 3% are economically identical.
APAC Context
Hong Kong and Singapore — advisory fees in these markets broadly follow Western conventions. Modified Lehman is used as a benchmark for mid-market transactions, though many firms also quote flat percentage proposals. The mature and competitive advisory market in both cities gives sellers genuine negotiating leverage.
Japan — advisory mandates in Japan often involve longer pre-transaction advisory periods and higher retainer components, reflecting the relationship-driven business culture. The Lehman formula may be applied to the success fee component while retainers are separately negotiated. For outbound cross-border deals (Japanese buyers acquiring overseas), fee structures often mix Lehman-based success fees with fixed advisory retainers.
Australia — the Australian mid-market advisory market references modified Lehman and flat percentage fees in roughly equal measure. FIRB complexity on transactions with foreign buyers can add advisory scope, sometimes reflected in a premium above standard formula rates.
India — advisory fees in India tend to be lower in absolute terms, reflecting domestic deal sizes and competitive dynamics, though cross-border transactions typically benchmark closer to international rates.
“Business owners often focus on the headline percentage and miss the more important negotiation points: the fee basis (enterprise value vs equity value), whether the retainer is credited against the success fee, and how the tail provision is scoped. The formula is a starting point, not the end of the conversation.”
— Daniel Bae, Founder & CEO, Lyndon Advisory
Comparing Lehman to Flat-Fee Advisory
Some advisory firms have moved away from Lehman-based structures entirely. Lyndon Advisory, for example, charges a single flat fee of 2% of enterprise value, capped at US$300,000 — with no monthly retainer, no expense recharges, and no formula mechanics to navigate.
| Deal Size | Modified Lehman | Lyndon Advisory (2%, cap $300K) |
|---|---|---|
| USD 10 million | USD 200,000 (2.0%) | USD 200,000 |
| USD 25 million | USD 575,000 (2.3%) | USD 300,000 |
| USD 50 million | USD 1,500,000 (3.0%) | USD 300,000 |
| USD 100 million | USD 3,500,000 (3.5%) | USD 300,000 |
For mid-market sellers, the choice of fee structure can be the single largest variable in total transaction cost. Understanding the Lehman formula is the first step in comparing advisory proposals on an apples-to-apples basis.
For a complete breakdown of advisory fees — including retainer structures, negotiation points, tail provisions, and APAC benchmarks by market — see M&A Advisory Fees: What Sellers Actually Pay.
Selling your business in Asia Pacific? Lyndon Advisory advises SME owners on structured sell-side processes across Hong Kong, Singapore, Australia, Japan, and broader APAC — success fee only, no retainer. Book a valuation meeting.