What is a Standard Buy-Side M&A Fee? The Modern Lehman Fee Structure

At Calder, we are often asked how our fees are structured. In this article, we will explain the structure and rationale of the fees we charge for our services, with a deeper dive into the Modern Lehman fee structure as the baseline for a standard fee structure for M&A buy-side engagements.

As there is a significant amount of time, energy, and effort that goes into any process an investment bank runs, it is important to note that a typical fee structure consists of a few elements. 

Customarily, fees include a monthly work fee or a larger upfront fee in order to support the administrative, outreach, and staffing requirements associated with successfully executing a buy-side mandate. In our opinion, investment banks should price work fees such that they can adequately compensate for the requisite overhead to carry out the mandate but should be low enough that the firm cannot reasonably make large profits. This keeps the firm focused on the prize, the success fee commission earned when the engagement’s objectives are achieved. In Calder’s case, the Success Fee is the fee that is paid upon the successful completion of a transaction. At no other time is a commission owed. 

It is important to make a distinction between the sell-side and buy-side fees and their incentives. When an investment bank represents the seller they are acting on the sell-side. Their responsibility and loyalty is to the seller alone, and their goal is to find the right buyer in terms of fit but also to maximize the price and terms. When representing the buyer, the Advisor is working solely on behalf of the buyer client, and their goal is to find the right acquisition candidate in terms of size, industry, and culture, but also to ensure that the deal structure is optimal for their client and the price that is paid is not a dollar more than fair. 

There are differing motivations and desired outcomes depending on which side of the deal you are working for. 

Banks charged with representing sellers are not only tasked with finding a buyer that is a good fit but also with fetching the greatest price and terms possible. Therefore a Success Fee structure that is simple, yet tiered makes a great deal of sense.

Accordingly, Calder’s sell-side Success Fees are often structured as a flat percentage of deal consideration, frequently with a “kicker” or slightly larger flat percentage charged only on consideration once the deal value crosses above a “fair value” threshold as an added incentive for our team to exceed valuation expectations.

Contrastingly, on the buy-side, our team is charged with not only identifying and introducing off-market sellers but also securing the best value and deal structure for our buyer client. Obviously, this means we are not and should not be incentivized to unnecessarily increase deal consideration in order to increase our fee.

Therefore, Calder’s buy-side Success Fees fall in line with industry-standard buy-side practice. In order to establish the proper incentives, buy-side firms have traditionally invoiced a variation of the Lehman formula. The Modern Lehman is the most accepted and popular structure today.

What is the Lehman fee structure and where did it come from?

This structure is named after the Lehman brothers who developed the scale in the late 1960s. Wikipedia explains “The Lehman Scale was widely used in the 1970s, 1980s, and 1990s but is no longer the standard that it used to be due to inflation [as well as regulatory hurdles and deal structure complexity].

VentureFirst describes the Lehman formula as a “[reverse] scaled success fee.” This is a fancy way of articulating that as the deal value or consideration increases, the fee percentage decreases overall. 

The industry standard is now the Modern Lehman. Exit Promise elaborates: “inflation made the [original Lehman] formula unsustainable. Now, the Modern Lehman formula is more popular as a method of computing the advisor’s investment banking fee.”

The Modern Lehman scale starts at 10% of the first million in consideration and on each subsequent million dollars in consideration is lowered by 2%, until the deal value reaches four million dollars. Success fees on deal value in excess of four million are only 2%.

This structure ensures that buy-side firms are properly incentivized and fairly rewarded for their hard work. It also encourages transparency as all clients work under the same fee structure. 

With each day that passes, additional rules, regulations, and complexity are added to the deal process making it even more crucial that business owners work with reputable and experienced advisors that can help them navigate a difficult M&A process all while charging a fair and reasonable fee.

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