What is required for a transaction to be classified as "arm's length"?

A transaction is classified as "arm's length" when both parties act in their own self-interest, engaging in negotiations free from any undue pressure or influence from each other. This means that each party is motivated to achieve the best possible outcome for themselves, ensuring that the terms of the transaction reflect fair market conditions. In an arm's length transaction, the parties typically have no prior relationship that might bias their negotiation, which helps to ensure that the price and other terms are fair and representative of the open market.

When both parties are acting independently and competitively, it fosters transparency and market integrity, which is critical for valuation purposes. This is why the definition emphasizes the independent motivation of each party involved.

In contrast, relationships between parties, financial interests that may compromise independence, or the requirement to negotiate through an agent do not contribute to the essential nature of an arm's length transaction. The key characteristic is the independence and self-interest of both parties involved in the deal.