What Does Scaled Success Fee Mean?
A scaled success fee is a type of fee structure paid to investment banker or M&A advisor upon successful completion of a sell side transaction. This fee structure can be employed to incentivize a banker, as to maximize value in a sales process. If a higher purchase price threshold is achieved in a transaction, the investment banker will receive a higher success fee.
A scaled success fee is more commonly used when a banker will be responsible for finding multiple prospective buyers, as those situations generally require an investment banker to take additional time and effort to position and market the business favorably.
Divestopedia Explains Scaled Success Fee
While a scaled success fee can vary based on negotiations between the business owner and the banker, two generally accepted scaled fee structures are the Lehman Scale and the Double Lehman Scale. The Lehman Scale is calculated based on a percentage of enterprise value as follows:
- 5% of the first $1,000,000,
- 4% of the second $1,000,000,
- 3% of the third $1,000,000,
- 2% of the fourth $1,000,000, and
- 1% of the remaining total.
The Double Lehman Scale doubles the percentages, comprising 10% of the first million, 8% of the second million, and so forth.
Both the Lehman and Double Lehman scaled success fee structure use a declining percentage scale for calculating success fees. This might not be the best method to incentive an investment banker because negotiating a higher purchase price will only marginally increase the success fee. An increasing percentage scale might be more appropriate to motivate an advisor to achieve the highest purchase price possible. As an example, an investment banker's fee could be structured to earn 4% commission on deal value between $15 - $20 million, but would earn an increase percentage of 8% on any transaction value over $20 million.