I think the issue is that Balogun wants to start regularly. Arsenal don't want to sell, but they might feel they have to to avoid having a disgruntled player in the locker room. (They might also not want to risk creating the perception that we'll hold promising young players against their will. We're finally back up as a very desirable destination.)
Balogun might simply not be willing to accept a role where he starts irregularly -- even if promised some game time -- or depends on Jesus getting hurt. (Eddie is also currently ahead of him, but I think that could change by training well.)
I think the best case scenario is that we sell below market value to a team willing to accept a buy-back clause. Even though his stock is high right now, the prices bandied around him don't reflect what I think he's worth. He's still young but he does look the part. I don't think the good season was a purple patch.
I seriously think that Balogun has the x factor and that comes out as "I don't want to sit on the bench". It would really be up to Arteta and Edu to prove to him that they have a plan for him and he is going to be a part of winning trophies.
If Balogun is willing to battle for his place, I wouldn't.
He's got a lot of natural ability, a good feel for the game, and the right athleticism. He'll be worth more if he's given the chance to contribute. (This is a case where I'd much rather see him loaned out again if management doesn't see him at least being able to work his way past Eddie.)
I say this as someone who was fine with us selling Willock, Iwobi, and the Ox. All talented players, but not ones I saw being able to carry us over the top.
If Balogun wants promises we can't make, I'd say push for a lower fee but include that buy-back clause.
And, if we find ourselves in a scenario where a buy-back isn't a possibility, then take the 40m. I still think that's too low for him but we're still at a phase in our team development arc where team cohesion is too important and fragile to not be affected by a disgruntled player. (Although maybe I'm just scarred from our not-so-distant experiences with that!)
I wouldn't argue with that, but I don't see Eddie getting anywhere close to the same fee. And as Ron reminds us below, we can't lose sight of the midfield as our biggest need. Gotta fund those transfers somehow!