Accounting & Reporting
Related-party Transactions
The building the founder owns, the consulting firm the CFO's spouse runs, the loan to the affiliate. Learn to find these, price them honestly, and disclose them — before a buyer, an auditor or a tax authority does it for you.
- Advanced
- 8 min total
- 12 chapters
What decision this helps you make: Which transactions in your books were not negotiated at arm's length, what the real economics look like once you correct them, and what has to be written down.
- Related case study: The Earnings That Shrank Under a Microscope
- Related data & research: Reading a Set of Accounts Like an Owner
What this topic is
A related-party transaction is any deal between the company and someone who can influence it or is influenced by it — an owner, an officer, a director, their family, an affiliate under common control. The transaction may be perfectly legitimate. What it is not is independently priced, and accounting treats it differently for exactly that reason.
Why it matters
Related-party terms are the easiest place in a set of books to move earnings without breaking a rule. Below-market rent inflates profit; above-market management fees deflate it; an affiliate receivable that never gets collected turns a distribution into an asset. Buyers normalize all of it, auditors have a dedicated standard for it, and tax authorities have statutory power to re-price it.
Who should learn it
Owners of companies that transact with entities they also own, controllers preparing footnotes, diligence teams rebuilding earnings, and directors who have to approve or refuse these deals.
What you will understand
- How to identify related parties, including the ones no org chart shows
- Why "it was at market" is an assertion you must be able to substantiate, not a default
- How a buyer normalizes related-party terms and what it does to the price
- The governance and documentation that make a legitimate related-party deal survive scrutiny
Prerequisites
Common misconception
"It is my company, so a deal between me and my company is nobody's business." Legally and commercially it is several people's business: your lender, whose covenant is measured on earnings your rent decision moves; your minority shareholders, whose value you can transfer to yourself; the tax authority, which has statutory power to reallocate income between entities you control; and any future buyer, who will find every one of these and reprice them at a multiple. The transaction is allowed. Pricing it privately and calling the result "earnings" is not.