Arm’s Length Transaction

An arm’s length transaction refers to a business deal/ agreement in which the buyer and the seller are two independent parties and both are attempting to get the best deal possible.

The purpose of the concept is to ensure that all the parties to the transaction are acting in their own self-interest and are not subject to any influence or pressure from the other party. Both parties have equal access to information associated with the deal.

For example, if a father is selling his car which he bought one year ago to his son for $5,000 but the wholesale value of the same car is $15,000 which indicates that the said transaction is not being carried on arm’s length basis.  The father is giving his son a pretty good deal instead of trying to sell the car in the market for a comparatively higher price. In other words, the father is not acting in his own self-interest instead he is giving his son a favor by selling the car to him below its market value.