When accounting and business negotiations occur, it is important to understand the concept of ‘arm’s length’. In brief, ‘arm’s length’ is a term that is used to describe any transaction between two parties that acts independent from one another. It is important to ensure that any transactions are conducted in an arm’s length manner, where each party acts independently to protect their own best interests. Failure to do so can result in a conflict of interests occurring.
Understanding and properly applying the concept of ‘arm’s length’ is important in any number of rule-based operations. For example, when accounting for revenue or expenses in a business transaction, the two parties must act independently to ensure financial accuracy. Or, if a business owner is selling assets and seeking fair market value, arm’s length negotiations are necessary.
Staying at ‘Arm’s Length’
It’s important for any business transaction to be conducted in an arm’s length manner. If a close relationship exists between the two parties involved in the transaction, it’s often wise to use a third-party to ensure that the transaction is carried out in an objective manner. This third party can help to verify that the transaction is fair market value and all due diligence is conducted.
While arm’s length transactions may appear straightforward on the surface, it is important to consider the underlying implications. Transactions between two parties must be conducted in a manner that is mutually beneficial, ensuring that each party remains impartial and that the interests of all parties are reflected and respected in the agreement.
Conclusion
In today’s business operations, understanding the concept of ‘arm’s length’ is an important part of being a successful business professional. An arm’s length transaction between two business partners is one that is carried out between independent parties acting in their own best interests. If a close relationship exists between the two parties involved, it is often best to use an independent third-party to ensure that the transaction is carried out objectively and all due diligence is conducted.