I am always willing to pay someone for a deal lead - as are most private equity firms. The most common mechanism is to sign a finder’s fee agreement in advance. and pay the finder upon closing the investment (so it is a contingent payment). Typical payout schemes range from 1% to 2% of the deal value – but I generally use the Lehman formula. The Lehman fee is calculated as 5% of the first million of deal value, 4% for the second million, 3% for the third million, 2% for the fourth million, and 1% for anything thereafter. The easy way to think about the Lehman formula is 1% plus $100k for any deal over $5MM in value. I have even paid double Lehman to someone for a strong proprietary lead; but have also paid only 1% for deals where a sell-side broker or banker is already involved.
For those of you thinking of entering into a finder’s fee agreement with a private equity group, make sure you have a multi-year tail on any introductions that you are making. Deals can sometimes take many months or even years to complete; so protect yourself.The positives of entering into a finder’s fee is that you can get paid a lot of money, half a million or more, if you introduce a deal to a private equity firm that is completed. The downside is that you don’t get paid for your work upfront. But given the upside, it is up to you to manage your time appropriately. If you have any questions about finder’s fee agreements, email me a question or leave a comment below.