Formula
The Lehman formula is a formula used by investment banks for the raising of capital for a business, either in public offerings or private placements, and is normally payable by the vendor(s) of the business once the funds have cleared. It deals with amounts greater than a million dollars. Below this mark, brokerage services and investment banks usually offer a set of tiered fees, or set-rate trading prices (such as $9.95 per trade).
Above a million dollars, the following is the Lehman Formula as originally described:
- 5% of the first $1 million raised from investors
- 4% of the second $1 million raised from investors
- 3% of the third $1 million raised from investors
- 2% of the fourth $1 million raised from investors
- 1% of everything above $4 million raised from investors.
The Lehman Formula was widely used in the 1970s, 1980s and 1990s. In recent years, due to inflation, a multiple of the formula is often used instead. For example, 5% of the first $10 million, plus 4% of the next $10 million is a common formula.
Its popularity has waned recently, mainly because there is little incentive for the adviser to "go the extra mile" in achieving a higher sale value. That has led to alternates such as the Double Lehman Formula (see below).
Read more about this topic: Lehman Scale
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