Business owners preparing for a sale encounter a surprisingly wide range of advisory fee structures, and the differences are not cosmetic. How an advisor charges shapes the advisor's incentives, the owner's out-of-pocket risk, and which engagements an advisor is willing to accept at all. Four models cover most of the sell-side market: the retainer plus success fee used by traditional investment banks, success-fee-only engagements offered by some boutiques and newer technology-enabled platforms, hourly or flat-fee billing for discrete deliverables, and the commission scales long associated with business brokers. Each structure divides risk between the owner and the advisor differently, and each carries documented tradeoffs. This article compares the four structures in neutral terms. It is educational content only, not legal, tax, or investment advice, and fee data cited here reflects published industry ranges rather than quotes for any specific transaction.
Why Fee Structures Vary With Deal Size
Published fee surveys consistently show that effective advisory fees are a declining percentage of transaction value. Industry data places typical success fees at roughly 6 to 10 percent for businesses selling below about 5 million dollars, roughly 4 to 6 percent in the 5 to 25 million dollar range, roughly 2 to 5 percent between 25 and 100 million dollars, and 1 to 2 percent above 100 million dollars. The pattern exists because the fixed cost of running a competent sale process, including preparing marketing materials, building a buyer list, managing diligence, and negotiating documents, does not shrink proportionally with deal size. A 4 million dollar sale can consume nearly as many advisor hours as a 40 million dollar sale.
That cost floor explains two features that appear across every fee model. First, minimum fees are common, and published sources describe minimums running from tens of thousands of dollars for small engagements into the low six figures for lower-middle-market mandates. Second, many full-service firms simply decline deals below a size threshold because the economics do not support their cost structure. Fee structure and minimum deal size are therefore two sides of the same question: who absorbs the fixed cost of the process, and when.
Retainer Plus Success Fee: The Traditional Investment Bank Model
The dominant structure in the middle market combines an upfront or monthly retainer, sometimes called a work fee or engagement fee, with a success fee paid only if a transaction closes. Published surveys report monthly retainers of roughly 5,000 to 20,000 dollars for smaller companies and 25,000 to 50,000 dollars or more for larger ones, typically running over a 6 to 12 month process. Annualized retainer totals in the lower middle market commonly land between roughly 45,000 and 150,000 dollars.
Two conventions define how the pieces interact. Retainers are usually credited against the success fee at closing, so an owner whose deal closes effectively pays only the success fee. And industry commentary generally holds that the retainer should remain a modest share of expected total compensation, often cited at no more than about 15 percent, so that the advisor's economics still depend overwhelmingly on getting a deal done.
- Rationale for the retainer: it screens for committed sellers, funds the heavy upfront work of preparing materials, and compensates the advisor for opportunity cost if a process stalls.
- Rationale for the success fee: it ties the bulk of compensation to an outcome the owner actually wants, a closed transaction at an acceptable price.
- Documented concern: a retainer that is too large relative to the success fee can dull the advisor's urgency, which is why crediting and the 15 percent guideline appear repeatedly in industry sources.
Success-Fee-Only Engagements
A second model eliminates the retainer entirely. The advisor absorbs the full cost of preparation and marketing and is paid only if the transaction closes. This structure has long existed among smaller boutiques competing for mandates, and it has become more visible as technology-enabled platforms lower the cost of producing deliverables such as financial analyses, confidential information presentations, and buyer research, which makes carrying that cost until closing more economically feasible.
The tradeoffs documented in industry commentary are symmetrical. The owner takes no out-of-pocket risk, which matters for businesses where a six-figure retainer commitment would be material. In exchange, the advisor bears all process risk, and that has predictable consequences. Firms working purely on contingency tend to screen prospective clients harder, accepting only businesses they believe are likely to sell. Some observers also note a structural bias toward certainty of closing over maximization of price, since an advisor paid nothing on a dead deal has a strong incentive to get any deal done. Percentage scales that rise with price, discussed below, are one common contractual response to that concern. Success-fee-only agreements also commonly include minimum fees and tail provisions, under which the fee is still owed if the business sells to a process-sourced buyer within a defined period after termination.
Hourly and Flat-Fee Billing for Discrete Deliverables
A third structure removes contingency altogether. Consultants, accountants, and some advisory firms charge hourly rates or fixed project fees for specific work products: a valuation analysis, sell-side quality of earnings preparation, a projection model, a confidential information memorandum, or general exit-readiness work. The fee is owed regardless of whether a sale ever occurs.
- Cost certainty: the owner knows the total cost in advance, which is the highest certainty of any model.
- Neutral incentives: because compensation does not depend on the outcome, the provider has no financial stake in whether the business sells, at what price, or to whom.
- No process management: this model buys deliverables, not a running of the sale itself, so owners using it typically either self-manage the process or pair the deliverables with a separate transaction advisor.
Hourly and flat-fee work is frequently used one to three years before a planned sale, when the goal is preparation rather than execution, and it also appears alongside the other models when a specialist deliverable such as a quality of earnings report is sourced separately from the lead advisor.
Business Broker Commissions and the Lehman Scales
At the smallest end of the market, business brokers historically charge a straight commission on the sale price, with published figures for main-street businesses commonly in the 8 to 10 percent range, often subject to a minimum commission. As deals grow, tiered scales derived from the original Lehman formula become common. The classic Lehman scale, dating to investment banking practice of the 1960s, charged 5 percent of the first million dollars of transaction value, 4 percent of the second, 3 percent of the third, 2 percent of the fourth, and 1 percent of everything above 4 million dollars.
Inflation eroded the original scale, so modern engagements more often use modified versions. The widely cited Double Lehman doubles each tier to 10, 8, 6, 4, and 2 percent, and other modified scales apply larger percentages to larger tranches, for example a published illustration of 10 percent on the first 2 million dollars and 7 percent on the next 2 million. Scaled formulas of this kind embed a declining marginal rate, which some sources criticize because the advisor earns the least on the incremental dollars that matter most to the seller. Reverse-scaled structures and accelerator clauses, where the percentage rises above a valuation benchmark, exist specifically to correct that incentive and are reported to be increasingly common.
Comparing the Tradeoffs Side by Side
No structure is categorically superior; each allocates the same three variables differently.
- Incentive alignment: retainer plus success fee balances commitment against contingency, with crediting and retainer caps guarding the balance. Success-fee-only maximizes the advisor's motivation to close but can tilt toward closing over price. Hourly and flat-fee work is incentive-neutral on outcome. Declining Lehman-style scales reward early dollars most, while reverse scales and accelerators reward stretch value.
- Upfront cost and risk: hourly and flat-fee arrangements place all cost on the owner regardless of outcome, hybrid models place a bounded portion upfront, and success-fee-only places none. The lower the owner's upfront risk, the more risk the advisor carries and the more selective the advisor tends to be.
- Minimum deal economics: traditional full-service economics, with six-figure retainer plus minimum success fees, generally require deals large enough to support them, which is one reason many banks pass on sub 10 million dollar mandates. Broker commissions and lower-cost contingent models are what historically served smaller businesses.
Engagement letters also vary on terms that sit outside the headline structure: exclusivity periods, termination rights, tail duration, expense reimbursement, and how the fee treats non-cash consideration such as earnouts, rollover equity, and seller notes. Published guides note that these clauses can move total economics as much as the headline percentage does.
Fee Structures and Process Preparation
Across all four models, a large share of what fees actually fund is preparation: normalized financial statements, a defensible earnings analysis, a projection model, marketing materials, and an organized data room. The declining cost of producing those deliverables with software is what has made lighter fee structures viable on deals the traditional model priced out; platforms such as Bankerly apply that approach to run full sell-side processes at software economics for companies below typical bank minimums. For owners evaluating any structure, the practical questions documented in industry literature are the same: what work is actually included, what happens if the deal does not close, and how the incentive math behaves at different price outcomes.
Sources
Frequently asked questions
- What is the Lehman formula in M&A advisory fees?
- The Lehman formula is a tiered fee scale from 1960s investment banking practice that charged 5 percent of the first 1 million dollars of transaction value, 4 percent of the second, 3 percent of the third, 2 percent of the fourth, and 1 percent of everything above 4 million dollars. Because inflation eroded the original tiers, modern engagements more often use modified versions such as the Double Lehman, which doubles each tier to 10, 8, 6, 4, and 2 percent.
- Are retainers usually credited against the success fee?
- In most middle-market engagements, yes. Published fee guides report that monthly retainers or upfront work fees are typically credited against the success fee at closing, so an owner whose deal closes effectively pays only the success fee. Industry commentary also suggests the retainer should stay a modest share of expected total compensation, often cited at no more than about 15 percent, to preserve the advisor's incentive to close.
- What success fee percentages are typical in the lower middle market?
- Published surveys place typical success fees at roughly 6 to 10 percent for businesses selling below about 5 million dollars, roughly 4 to 6 percent in the 5 to 25 million dollar range, and roughly 2 to 5 percent between 25 and 100 million dollars, with minimum fees common on smaller deals. Actual percentages vary with industry, process competitiveness, and how the engagement letter treats non-cash consideration.
- Why do some advisors charge no retainer at all?
- Success-fee-only advisors absorb the cost of preparation and marketing and are paid only if a transaction closes. The model has long existed among boutiques competing for mandates, and lower deliverable-production costs at technology-enabled platforms have made it more economically feasible. The documented tradeoff is that fully contingent firms screen clients harder and carry a structural incentive toward certainty of closing, which contract features such as rising percentage scales are designed to counterbalance.
- What is a minimum fee and why do engagement letters include one?
- A minimum fee is a floor on the advisor's total compensation that applies even if the percentage formula would produce a smaller number. It exists because the fixed cost of running a sale process does not shrink proportionally with deal size. Published sources describe minimums from tens of thousands of dollars for small engagements into the low six figures for lower-middle-market mandates, and minimums are one reason many full-service firms decline deals below a size threshold.
Considering a sale in the next few years? See what a prepared process looks like.
Keep reading