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Lehman Fee

Definition

The Lehman fee (also called the Lehman formula or Lehman scale) is a standard fee structure for buy-side deal origination, based on a sliding percentage of total enterprise value. The traditional formula is 5% on the first million, 4% on the second, 3% on the third, 2% on the fourth, and 1% on amounts above. For most lower middle market transactions, this simplifies to approximately 1% of total enterprise value.

Context

In Ep. 3, Dan Herr introduces the Lehman fee as an anchor for thinking about internal BD compensation. He argues that BD professionals familiar with buy-side origination economics know that an external deal originator can earn a Lehman fee (~1% of TEV) for proprietarily sourcing a deal. While internal BD professionals cannot expect the same percentage — since the firm covers salary, data subscriptions, CRM, and other overhead — the Lehman fee provides a reference point for evaluating whether internal comp is reasonably aligned with the value of proprietary origination.

Dan notes that external buy-side fees can range from 1% up to 5–6% of TEV for highly attractive proprietary assets, with haircuts applied if the deal ultimately goes through a banker. The wide variance in external fee economics is one reason some BD professionals leave firms to start their own buy-side origination practices.