Purchase of firm units: Overview, definition, and example
What is purchase of firm units?
The purchase of firm units refers to the acquisition of ownership stakes or shares in a business entity, often in the form of units in a limited liability company (LLC), partnership, or investment fund. A "unit" in this context represents a share or interest in the firm, granting the purchaser certain rights, such as a share in profits, voting rights, or a stake in the overall decision-making process of the entity. The purchase of firm units can occur through private transactions or public offerings, depending on the structure of the firm and the nature of the units being sold.
For example, an investor may purchase firm units in a real estate investment trust (REIT), gaining a portion of the ownership and the right to receive a share of its rental income.
Why is the purchase of firm units important?
The purchase of firm units is important because it allows individuals or entities to invest in a business or organization, giving them a stake in its performance and potential profits. For businesses, selling firm units can provide a way to raise capital, expand operations, or bring in new partners. For investors, purchasing firm units can be a way to diversify their portfolios, earn returns on their investment, and potentially influence business decisions through ownership rights. Additionally, the process of purchasing firm units typically involves a legal framework, ensuring that both buyers and sellers are clear on the terms of ownership, rights, and responsibilities.
For businesses, offering firm units is a means to access capital or bring in new expertise, while for investors, purchasing firm units offers an opportunity for financial growth and participation in the success of the firm.
Understanding purchase of firm units through an example
Imagine a startup company that is looking to raise capital to fund its expansion. The company decides to sell firm units to investors in exchange for funding. Each unit represents a 1% ownership stake in the company, and the company sells 1,000 units. An investor purchases 100 units, giving them a 10% ownership stake in the company. In return, the investor gains the right to share in the company’s profits, attend shareholder meetings, and vote on important company decisions.
In another example, an individual might purchase units in a private equity fund, which invests in multiple companies. The units give the investor access to a portion of the fund's profits, which are distributed based on the fund’s performance and the amount of units the investor holds.
An example of a purchase of firm units clause
Here’s how a purchase of firm units clause might appear in an investment agreement:
“The Investor agrees to purchase 500 units in the Company for a total purchase price of $500,000. Each unit represents a 1% ownership interest in the Company. The Investor shall have the right to receive distributions of the Company’s profits in proportion to their ownership stake and to vote on matters presented to the Members of the Company. The units are subject to the terms and conditions outlined in this Agreement.”
Conclusion
The purchase of firm units allows businesses to raise capital and bring in new partners or investors, while providing buyers with an opportunity to gain ownership, influence, and potential financial returns. Whether in the form of ownership in a private company, an investment fund, or other entities, purchasing firm units offers significant benefits and responsibilities for both businesses and investors. Understanding the terms and implications of purchasing firm units is essential for both parties to ensure a smooth and beneficial transaction.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.