The Double Lehman Formula is a tiered success-fee scale that M&A brokers and investment banks use to price the sale of a business. It charges 10% on the first $1 million of deal value, 8% on the second, 6% on the third, 4% on the fourth, and 2% on everything above $4 million. On a $5 million sale, that math produces a $300,000 fee. It is the default starting point for lower middle market engagements, and every piece of it is open to negotiation.
The 10-8-6-4-2 Tier Structure
The formula assigns a separate rate to each million-dollar slice of the total transaction value:
- First $1 million: 10%
- Second $1 million: 8%
- Third $1 million: 6%
- Fourth $1 million: 4%
- Everything above $4 million: 2%
The higher rates on the first tiers compensate the broker for the baseline work every engagement requires regardless of size. The flat 2% tail above $4 million keeps the fee growing with deal value without feeling punitive on larger transactions. A broker who negotiates a price up from $8 million to $10 million earns an additional $40,000 for that effort, which keeps incentives aligned on the upside while holding the blended rate down.
How to Calculate the Fee
Each dollar of the purchase price falls into one bucket and gets multiplied by that bucket’s rate. On a $7 million deal, the math runs like this:
- $1 million × 10% = $100,000
- $1 million × 8% = $80,000
- $1 million × 6% = $60,000
- $1 million × 4% = $40,000
- $3 million × 2% = $60,000
Total success fee: $340,000, or about 4.9% of the deal. Run the same process on other sizes and the effective rate shifts:
- $5 million deal: $300,000 fee (6.0% effective)
- $7 million deal: $340,000 fee (4.9% effective)
- $15 million deal: $500,000 fee (3.3% effective)
The effective percentage falls as the deal grows because more of the value sits in the 2% bucket. That’s why sellers of larger companies feel like they’re getting a volume discount, and brokers handling smaller deals feel justified charging the higher blended rate.
What Counts as Transaction Value
The success fee applies to the total economic benefit the seller receives, not just the cash wired at closing. Engagement letters typically define “transaction value” or “enterprise value” to pull in every form of consideration the buyer delivers:
- Cash paid at closing.
- Seller notes, where the buyer pays part of the price over time. The amount counts toward the fee even though the seller hasn’t collected the cash yet.
- Earn-outs, meaning contingent payments tied to future performance. Most engagement letters include these at face value, though some discount them.
- Assumed debt. If the buyer takes over the company’s existing loans, that relieves the seller of a financial burden and gets added to transaction value.
This is where disputes happen most often. A seller might assume the fee only covers the closing check, then discover the broker is also calculating a percentage on a $2 million earn-out and $500,000 in assumed liabilities. Read the engagement letter’s definition before signing it. If you want earn-outs excluded or discounted because they’re uncertain, negotiate that upfront. Trying to rework the definition after the deal closes almost never works.
Retainers and Minimum Fee Floors
The success fee is rarely the only cost. Most intermediaries charge an upfront retainer, and many set a minimum fee that applies regardless of what the formula produces.
Retainers for lower middle market deals ($5 million to $50 million in value) generally run $25,000 to $100,000, paid as a lump sum or in monthly installments. For smaller main street businesses, retainers tend to run $10,000 to $25,000. The retainer is usually credited against the success fee at closing, so it functions more like a deposit than an added charge. If the deal falls through, though, it is non-refundable.
Minimum fee floors protect the broker when the formula produces too small a number to justify the work. For lower middle market engagements, minimums typically fall between $50,000 and $250,000. On a $600,000 deal where the formula produces $60,000, a $50,000 minimum doesn’t bite. On a very small transaction where the formula only yields $30,000, a $50,000 floor kicks in and the broker collects the higher amount. Getting the minimum wrong can mean paying meaningfully more than the formula suggests on a deal that comes in below expectations.
What’s Negotiable in the Engagement Letter
The Double Lehman is a starting point, not a final offer. Experienced sellers and their counsel work several levers:
- Adjusted tier percentages. Some sellers negotiate a structure like 4% on the first $8 million and 6% above a target price, which pushes the broker to maximize the sale price rather than just close any deal.
- Flat percentage. For larger lower middle market deals, a flat 4% to 5% can be simpler and cheaper than the tiered scale.
- Retainer credits. Insist on full credit of retainer payments against the success fee. Some agreements only credit a portion.
- Expense caps. Marketing, travel, and data room costs add up. Negotiate a cap (commonly $15,000 to $30,000) or require pre-approval above a threshold.
- Minimum fee reduction. If your expected deal value sits near the floor, negotiate the floor directly rather than haggling over percentages that won’t matter.
Brokers push back on some of these and accept others. A seller who wins a lower success-fee percentage may have to accept a longer tail period or a higher retainer in trade. Expect to give something back.
The Tail Period
The tail provision entitles the broker to a success fee if the company sells within a specified window after the engagement ends. The logic: a broker who introduced the eventual buyer shouldn’t lose the fee because the seller terminated the contract a month before closing.
Tail periods typically run 12 to 24 months after termination. Brokers push for the longer end; sellers should aim for 12 to 18 months. Some agreements apply the tail only to buyers the broker actually introduced or contacted, which is far more reasonable than a blanket tail covering any buyer. If a broker proposes a tail that applies to all buyers regardless of introduction, push to narrow it.
Another lever: declining fee percentages during the tail. The full success fee in months one through twelve, then 75% of the fee in months thirteen through eighteen. The structure acknowledges that the broker’s contribution fades over time and gives both sides reason to wrap things up rather than let the tail become a perpetual obligation.