Lehman Scale and M&A success fee: how does it work and when does it make sense?

Lehman Scale is the most widespread success fee calculation structure in the M&A sector, historically developed by Lehman Brothers in the 1960s and adapted over time in numerous variants. It is a tiered system applying progressively lower percentages to increasing value tranches of transaction value. The logic is simple: the advisor substantially works the same amount of time to close a 30 million or 50 million deal, therefore the percentage on additional value must decrease to avoid disproportionate compensation relative to effort.

Classic original Lehman Scale was 5-4-3-2-1: 5% on first 1 million of value, 4% on next 1 million, 3% on next 1 million, 2% on next 1 million, 1% on all value exceeding. It is completely obsolete for the current market — for a 30 million deal it would produce a success fee of only 320,000 euros, unrealistically low compared to operational cost of managing a mid-market sell-side mandate.

Modern Lehman Scale (used in contemporary Italian mid-market) typically is: 5% on first 5 million, 4% on next 5 million (5-10M), 3% on next 10 million (10-20M), 2% on all above 20 million. For a 30 million deal it produces: 250k + 200k + 300k + 200k = 950,000 euros success fee (3.2% on total value). For a 50 million deal: 250k + 200k + 300k + 600k = 1,350,000 euros (2.7%). For a 100 million deal: 250k + 200k + 300k + 1,600k = 2,350,000 euros (2.4%). The structure captures the scale effect well: decreasing average percentage as deal grows, but monotonically increasing absolute value.

Lehman Scale makes sense when: deal value is uncertain at mandate phase (could be 20 or 60 million, depending on how the auction unfolds); the seller wants to structure compensation that rewards success but balanced across the entire possible value range; both parties trust the advisor’s process expertise to bring buyers to best price.

When Lehman Scale makes less sense: deals with very certain and high value (above 100 million), where flat fee 2-2.5% is simpler and produces comparable results; operations where the seller wants to explicitly incentivize the advisor to exceed a threshold (in this case Reverse Lehman is better); deals with high outcome uncertainty (in this case a hurdle-based structure with minimum threshold protects the seller from paying success fee on a sub-optimal deal).

An emerging pattern in the Italian mid-market is Hybrid Lehman: Modern Lehman as baseline but with additional “kicker” (e.g., +0.5-1% additional success fee on all value exceeding a threshold valuation agreed a priori). This strongly aligns the advisor to beating expected value and is particularly effective for entrepreneurs who have strong internal valuation but want the advisor to work to exceed it.