Investment bankers and brokers use the Modified Lehman Formula as a structured, tiered approach to calculate fees on large financial transactions, such as mergers, acquisitions, and other high-value deals. This fee structure, originally based on the Lehman formula, has been adjusted over time to better align with modern deal complexities and competitive pressures.

Here are a few key reasons the broker, and you, would likely favor the Modified Lehman Formula:

1. Incentive-Based Compensation: By charging higher rates on the initial deal tiers and progressively lower rates on subsequent tiers, the formula aligns the broker’s incentives with the client’s deal size. It rewards the broker proportionately for handling larger and potentially more complex deals.
2. Market Competitiveness: The modified formula allows brokers to stay competitive by offering a fair and structured fee schedule that can be more appealing to clients compared to flat fees. It also reflects an industry standard that clients are often familiar with, enhancing client trust.
3. Risk and Effort Allocation: The formula acknowledges that early million-dollar amounts in deals often require more intensive advisory work and carry higher risks. Thus, higher fees for these initial portions of the transaction compensate the broker for these initial efforts and risks.
4. Scalability: The tiered structure is scalable and adapts well to deals of various sizes. It gives brokers a consistent framework to calculate fees while being fair to clients, as they pay a lower percentage on larger amounts.

Overall, the Modified Lehman Formula allows brokers to provide transparent, consistent, and scalable fee structures that align well with their business model, market expectations, and client needs. Many banks often charge an upfront fee or monthly retainers on top of this – Business Exits does not charge those fees, ensuring all incentives are aligned to sell your business!