Business Valuations

The Lehman Formula Demystified: A Comprehensive Look at Transactional Fees

Have you been thinking to yourself I’m ready to sell my business? This is a pivotal moment for any business owner as it marks the culmination of years of hard work and strategic planning. Next comes the business sales process.

As you prepare for your exit, the people you work with matter. What you take away depends on the fees you incur from the business transaction. Thankfully, transaction fees are often simplified if business brokers use the Lehman Formula as their calculation method.

What Is the Lehman Formula?

The Lehman Brothers investment bank introduced the Lehman Formula as a method for determining the commission applicable to business transactions.

The initial configuration of the Lehman Formula follows a ladder pattern of 5-4-3-2-1, indicating the percentage breakdown for different transaction tiers. For a $5 million transaction, the Lehman Formula works like this:

  • 5% on the initial $1 million engaged in the transaction
  • 4% on the subsequent $1 million
  • 3% on the third $1 million
  • 2% on the fourth $1 million
  • 1% on any amount exceeding $4 million

What Is the Double Lehman Formula?

To account for inflation, business brokers frequently use variations of the original Lehman Formula, opting for multiples such as the Double Lehman Formula. This adjusted structure is particularly prevalent in middle market transactions, given their intricate nature and extended closing periods.

In the example of a $5 million transaction, the fee distribution under the Double Lehman formula works as follows:

  • 10% on the initial $1 million engaged in the transaction
  • 8% on the subsequent $1 million
  • 6% on the third $1 million
  • 4% on the fourth $1 million
  • 2% on any amount exceeding $4 million

Other Variations of the Lehman Formula

While the Lehman Formula itself is a specific percentage-based fee model, variations and adaptations have emerged over time to suit different transaction structures and preferences. Some notable variations include:

  • Triple Lehman Formula: This model extends the ladder pattern to a 5-4-3-2-1-1 configuration, introducing an additional tier with a 1% fee beyond a certain transaction threshold.
  • Fixed Fee Plus Lehman Formula: By combining a fixed fee with the Lehman Formula, this variation involves a set amount plus a percentage of the transaction value. For instance, a $50,000 fixed fee plus 2% of the deal value.
  • Cap and Collar Lehman Formula: This model sets upper and lower limits (cap and collar) on the fee percentage. The fee might be capped at a certain percentage, ensuring it does not exceed a predefined maximum.
  • Performance-Based Lehman Formula: Introducing performance metrics, this variation ties the fee percentage to specific achievements or milestones in the deal process. Higher performance may result in an increased fee percentage.
  • Tiered Lehman Formula: This model introduces multiple tiers with different fee percentages for various ranges of the transaction value. Each tier has its own distinct percentage, providing a more nuanced approach to fee calculation.

It’s important to note that the suitability of these variations depends on the specific characteristics of the transaction, the preferences of the parties involved and the prevailing market conditions. Fee structures may be customized based on these factors to ensure that the interests of both potential business buyers and sellers are aligned.

Why Brentwood Growth Uses the Double Lehman Formula

At Brentwood Growth, our business model is entirely contingent on the success of the transaction and paid upon closing. The duration from initial discussions to the completion of a transaction typically lasts between 6-9 months.

Due to the performance-based nature of our compensation, we are selective in accepting engagements. We will only undertake an engagement if we are confident of generating robust market interest, securing a price with terms that meet your acceptance criteria and presenting you with multiple offers.

The payment amount is based on the final purchase price of your business, and we strive to optimize your business valuation to the best of our ability.

Sell Your Business with a Business Broker like Brentwood Growth

Business owners seeking to sell their businesses in the home service or facility management industry should consider partnering with a reputable business broker like Brentwood Growth. We have a large network of prospective buyers looking to purchase businesses of various scale from small business to large.

If you are looking to sell a landscaping company, you should have a foundational understanding of what it’s worth and our business brokers will assist you with this initial step. Our free and complimentary business valuation aims to provide you insight into the financial health of your business.

As we delve deeper into your specific timeline, objectives and financial statements, we’ll identify strengths as well as areas for improvement. Then we’ll craft effective strategies to enhance your business’s appeal to potential buyers at a fair asking price.

Having been in your position, we recognize the significance of this business sale decision and empathize with the considerations small business owners and others alike face during the selling process. We’ll help you determine your business assets and intellectual property to be included in the purchase agreement and guide you through due diligence. From valuation positioning to ultimately closing the deal, we are committed to supporting you every step of the way.

Contact us today to get started; we value the opportunity to work with you.