Arm's-length definition

The term, "arm's length" means when a transaction or other interaction is conducted by two parties, both parties are acting in good faith for their own self-interest and without any conflict-of-interest. The assumption is made that market conditions -- or environment, in the case of a non-marketplace situation -- determines the direction of a transaction.

If a family-owned business is looking for its next CEO and the founder installs one of his or her children, regardless of that person's qualifications, that's not arm's length. However, if that same company engages a selection firm to find the best qualified candidates, perhaps including the founder's child, an arm's length transaction will occur if the company follows the subsequent recommendation.