In the business world, affiliate is used to describe a relationship between two companies where one company owns a stake in the other company but less than a majority. Affiliation is a relationship in which two or more companies are subsidiaries of the same parent company that is larger than them. The term affiliate is defined in different ways depending on which market it is used in – corporate, capital or the securities market.
A group of companies or organizations that are associated with each other and offer complementary or compatible products and services is called an affiliate network.
The word “affiliate” is used in multiple scenarios to indicate a relationship between two parties. In the business world, it plays a significant role in establishing the relationship between two companies. Read on to find out more.
What is an affiliate?
An affiliate is a relationship between two companies in which one company owns a stake in the other but less than a majority. Affiliation, an extension of the term, is the relationship between two or more subsidiary companies of the same parent company.
Affiliate is often used in the retail sector as well when one company sells the services and products of another for a commission. Given the number of online companies today, this term is being widely used in the retail space to describe a situation where the affiliate company helps another company by driving its internet traffic and online sales.
Different affiliates
The term affiliate is defined in different ways depending on which market it is used in – corporate, capital, or the securities market. Let’s look at each one in detail.
Corporate affiliates
In the corporate world, affiliates are related to each other. The affiliate company is usually a subordinate of the other company which holds less than 50% stake in it. That is, the bigger company will own a minority stake in the affiliate. If the parent company holds more than 50% stake in another company, the second one will be the subsidiary of the parent company. Therefore, an affiliate can be determined by how much ownership the parent company holds in it.
For example, if company ABC owns a 45% stake in company XYZ and a 65% stake in company PQR, then XYZ and ABC are affiliates and PQR is ABC’s subsidiary. However, XYZ and PQR can also describe each other as affiliates.
International affiliates
Setting up international affiliates is a way for multinational companies to protect their image and brand value if the affiliate company in various countries don’t do well. This system also helps international companies penetrate foreign markets through the local companies they set up if their brand name is not favored in these countries. Companies can also become affiliates through mergers, spinoffs and takeovers.
Retail affiliates
In the retail sector, a company is said to be the affiliate of another company if it sells the latter’s products and services for a commission. This applies to both physical as well as e-commerce retail platforms. In such situations, products and services are ordered from one company but the sale is effected on the website or store operated by the affiliate. Some of the best examples include eBay and Amazon.
Understanding other types of affiliates
The business world is full of affiliates. Business operations and transactions happen through thousands of affiliate relationships every day. Two entities can be affiliates if one of them owns a minority stake in the other.
In commerce, two entities are said to be affiliates if either one of them can control the other, or if a third entity controls both of them. Since they are so closely connected, affiliates are normally subject to stricter legal prohibitions and requirements than regular business relationships. This is done mainly to ensure that insider trading does not happen between the affiliates.
In a financial loan agreement, affiliation is described as an entity other than a subsidiary controlling directly or indirectly, is controlled by, or under common control with an entity.
When it comes to the banking sector, banks that do not have access to foreign markets take up underwriting of securities through affiliate banks in those countries.
A group of companies or organizations that are associated with each other and offer complementary or compatible products and services is called an affiliate network. These affiliates will pass on sales leads to each within the network. Very often, they may even offer cross-promotional deals. This encourages clients who are associated with one company to look into the products being offered by another affiliate as well.
Difference between an affiliate and a subsidiary
In an affiliate relationship, the parent company owns a minority stake in the smaller company. Contrary to this, a subsidiary is a company in which the parent company owns the majority stake or more than 50% of it. The parent company has the controlling share as the majority stakeholder. For a subsidiary, all of its major decisions, such as hiring and firing senior executives and taking strategic decisions among others, are done by the parent company.
