The Advisor's work in corporate finance transactions is normally paid through two combined fee structures, the front fee and the success fee:When it comes to success fees, Advisors involved in corporate finance transactions often take different approaches, frequently driven by the desire to secure a mandate even at a discount.
For years, however, the most authoritative and widely accepted approach — one that both Clients and Advisors agree on — has been the one used by the investment bank Lehman Brothers in the 1970s.
The Old Lehman Scale
It is a tiered commission scale known as the Lehman Scale (see Wikipedia: https://en.wikipedia.org/wiki/Lehman_Formula).
- 5% on the first $1 million
- 4% on the second $1 million
- 3% on the third $1 million
- 2% on the fourth $1 million
- 1% beyond the fifth $1 million.
This is no longer the standard it was up until the 1990s due to inflation ($100 in 1970 is worth $627.39 as of 2016). A five-million-dollar transaction was an attractive deal when the formula was designed in the 1970s, but today it is considered small by most investment banks.
The Lehman Scale for the Mid Market (Modern Lehman)
The Lehman Scale has therefore been adjusted over recent years, both to account for the effects of inflation and because the work involved in closing mid-sized transactions is just as challenging as closing larger ones.
The time required to close mid-sized transactions is also similar to that of larger ones.
Since the 1990s, therefore, the Double Percentage Lehman or Modern Lehman (see Wikipedia again: https://en.wikipedia.org/wiki/Lehman_Formula) has been adopted:
- 10% on the first $1 million
- 9% on the second $1 million
- 8% on the third $1 million
- 7% on the fourth $1 million
- 6% on the fifth $1 million
- 5% on the sixth $1 million
- 4% on the seventh $1 million
- 3% beyond the eighth $1 million.
Today, the success fee on a $5 million transaction has therefore moved from 3% (old Lehman Scale) to 8% (Modern Lehman).
