In valuation, a rule of thumb is a common procedure or practice used to value a company. These procedures are based on past valuation experiences and estimates in that industry, rather than specific calculations. Rule of thumbs typically involve using multiples that are relevant to whichever industry the valued firm is in.
The Lehman Scale is an industry accepted formula used by investment banks, M&A advisory firms, and business brokers to calculate the success fees on a sell-side (or sometimes buy-side) engagement.
The Lehman Scale is calculated based on a percentage of enterprise value as follows:
5% of the first $1,000,000, plus
4% of the second $1,000,000, plus,
3% of the third $1,000,000, plus,
2% of the fourth $1,000,000, plus,
1% of the remaining total.
The double Lehman is another variation of the above fee structure where the percentage increments go from 10%, 8%, 6%, 4% to 2%. Most investment banking engagements would also include a non-refundable work fee and a minimum level fee should a transaction close regardless of the transaction size. The size of the deal dictates how negotiable these percentages are.
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