BMBY Mechanism and Separation Clauses: How to Dissolve a Business Partnership Without Destroying the Company
Adv. Samuel Even
BMBY Mechanism and Separation Clauses: How to Dissolve a Business Partnership Without Destroying the Company
The bottom line: Founders’ disputes are one of the leading causes of failure for startups and partner-owned businesses in Israel. In most cases, the problem isn’t that partners fought — it’s that they never planned what would happen when they did. A BMBY mechanism and proper separation clauses can save the company, the money, and the relationship.
Nobody likes thinking about the end at the beginning. But those who don’t — pay dearly later.
Why Business Partnerships Fall Apart
The statistics are harsh: most business partnerships reach a point of conflict. The reasons repeat themselves:
Disagreements on company direction. One partner wants to raise investors and scale fast. The other wants organic growth and control. No compromise is possible.
Imbalance in contribution. One partner works 16-hour days. The other is “busy with other things.” Frustration builds until it explodes.
Entry of external investors. An investor demands control, dilutes the founders, or favors one partner over another. What was an equal partnership becomes a power struggle.
Personal circumstances change. Divorce, illness, another opportunity, or simply burnout. Not every separation is hostile — but without a mechanism, even a friendly parting can deteriorate.
Deadlock. Two partners with 50%-50% who can’t agree on anything. The company is paralyzed. No decisions are made. Employees flee, clients leave.
What Is the BMBY Mechanism and Why Is It Brilliant?
BMBY — Buy Me Buy You — is a contractual separation mechanism that works like an internal auction between partners.
How it works:
Step 1: Partner A sends Partner B a notice: “I’m willing to buy your share in the company for X shekels.”
Step 2: Partner B must decide within a defined period (typically 30-60 days): either sell their share at the proposed price, or buy Partner A’s share at exactly the same price.
Step 3: Whoever doesn’t buy — sells. The deal closes.
Why is it brilliant? Because the mechanism forces the person proposing the price to be fair. If they offer too low — the other partner simply buys them out at that low price. If they offer too high — they’ll overpay for the real value. The result: a price closest to the company’s true value.
The Drawbacks You Must Know
The BMBY mechanism is excellent but not perfect. There are traps:
Economic imbalance. If one partner has cash access and the other doesn’t, the wealthier partner can offer a low price knowing the other can’t buy back. Result: unfair dispossession. Solution: Include a reasonable financing period, or allow the acquired partner to raise external funding.
Information asymmetry. The partner managing day-to-day operations knows far more about the company’s condition. They can price manipulatively. Solution: Require full disclosure before activating the mechanism, or condition activation on an independent valuation.
Not suitable for all ownership structures. BMBY works excellently with two partners. With three or more, the mechanism becomes significantly more complex. Solution: Tailor a specific mechanism to the ownership structure.
In the IDB case, a BMBY mechanism was demanded between controlling shareholders, but the request was rejected — because the mechanism wasn’t included in the agreement to begin with. If it’s not in the contract, it doesn’t exist.
Beyond BMBY: 6 Separation Mechanisms Every Partners’ Agreement Must Include
1. Tailored BMBY Clause
As described above — with adjustments for economic imbalance, disclosure, and financing periods.
2. Vesting Mechanism
What it is: Each founder’s shares “vest” over time (typically 4 years with a 1-year cliff). If a partner leaves early, they forfeit unvested shares.
Why it’s critical: Prevents a situation where a founder leaves after two months with 50% of the company.
3. Right of First Refusal (ROFR)
What it is: If a partner wants to sell their share to a third party, the other partners get the first opportunity to buy on the same terms.
Why it’s critical: Prevents an unwanted partner from entering the company.
4. Drag-Along and Tag-Along Clauses
Drag-Along: If a majority shareholder sells, they can “drag” minority shareholders into the sale on the same terms.
Tag-Along: If a majority shareholder sells, minority shareholders have the right to “join” and sell on the same terms.
Why it’s critical: Protects both majority and minority in a sale scenario.
5. Tiered Dispute Resolution Mechanism
Stage 1: Direct negotiation between founders. Stage 2: Mediation before an agreed mediator. Stage 3: Binding arbitration. Stage 4: BMBY activation if arbitration fails.
Why it’s critical: Creates opportunities for resolution before reaching a point of no return.
6. Non-Compete Clause
What it is: A departing founder commits not to compete with the company for a defined period.
Why it’s critical: Protects the company’s intellectual property, clients, and employees.
5 Fatal Mistakes Founders Make
“We’re friends, we don’t need an agreement.” This is the most common mistake. Good companies fall apart precisely because there was no agreement. An agreement doesn’t signal distrust — it signals business maturity.
“We’ll sort it out after the first funding round.” Investors demand a proper founders’ agreement. No agreement — no funding.
“We split 50-50, fairest possible.” A 50-50 split is a recipe for deadlock. Without a majority, there’s no decision. Better 51-49 with minority protection mechanisms.
“We didn’t think about what happens if a partner dies/leaves/is disqualified.” Emergencies don’t wait. Without a mechanism, the company may be stuck with heirs, spouses, or estate managers who understand nothing about the business.
“We downloaded the agreement from the internet.” A generic founders’ agreement is worse than no agreement — because it creates a false sense of security. Every company needs an agreement written for its specific circumstances.
When to Contact a Lawyer
Before forming the company — the ideal time. When everyone is still enthusiastic and agrees on everything.
When a new partner or investor joins — every ownership change requires an agreement update.
The moment you sense a dispute — the earlier you act, the greater the chance of resolution without destruction.
When the dispute has already erupted — there’s still much to be done, but options narrow with time.
How Our Firm Can Help
Samuel Even & Co. Advocates assists founders, partners, and business owners at every stage of partnership, including:
- Drafting founders’ and partners’ agreements — with BMBY, vesting, ROFR, and tailored separation mechanisms
- Ownership structure advisory — share allocation, voting rights, protection mechanisms
- Representation in partner disputes — negotiation, mediation, arbitration, and litigation
- Investor entry support — agreement updates, founder protections, dilution mechanisms
- Executing separation mechanisms — BMBY activation, agreed partnership dissolution, orderly exits
Don’t wait for a deadlock. Contact us today to secure your partnership’s future.
03-6348020 | [email protected]