What Is an Affiliate Company and How Does It Work?

If you've been part of the affiliate marketing space for a long time, you've probably heard about affiliated companies. In fact, there are around 9,600 affiliated companies and services worldwide. Moreover, the affiliate marketing industry is predicted to reach about $14.3 billion in 2023 and $15.7 billion in 2024, which shows how lucrative this industry is.

But what exactly is an affiliate firm, and how does it work? This guide will help you learn all things related to affiliated companies, their main advantages and disadvantages, and how to become an affiliate for a company.

Here's what all new affiliates should know before signing an affiliate marketing agreement with affiliate companies.

What Are Affiliated Companies?

So what is an affiliate company? Affiliated companies can be defined in two ways. The first is to see them as two companies, one of which is a minor shareholder of the other. In other words, an affiliate company is an enterprise that has a minority share—less than 50%.

Another way of looking at affiliates is as two related companies that are under the control of a separate third party. Two companies can also be affiliated through ownership, similar interests among family members, or by sharing employees, equipment, or facilities.

Affiliate Company Example

To better understand this connection between the two companies, let's take a look at an example. Let's say that Company A, headquartered in Finland, wants to expand to the Indian market. To achieve this, it decides to buy 25% of the shares of Company B, which operates in the Indian market. With this move, Company A claims a share of Company B's capital gains, thereby gaining greater control over the Indian market.

The Hyundai Group may be the best real-life example of an affiliate partnership. Namely, its affiliated companies include Hyundai Mobis and Kia Motors, of which Hyundai owns 34%.

How Do Affiliated Companies Work?

Affiliated companies usually combine their business operations, management, or supervision without losing their independence. The parent company can also implement some of its operations in its new affiliates.

However, since it owns less than 50% of the company, its liability will be limited. In other words, the affiliated companies can keep their brand identities and raise funds without affecting the parent company.

The main reasons companies connect with each are gaining access to a bigger market and customer base, reducing the competition, and saving on taxes.

Advantages of Affiliated Companies

Affiliated companies can benefit in the following areas:

Opportunity to Enter New and Foreign Markets: The fastest way to access a new market is to connect with a company that already has experience in that market. With this move, companies will also be able to enter foreign markets, meaning both parties will profit by giving each other access to geographical regions that they had no other way of entering.
Additional Investment Opportunities: A parent company can get a significantly higher return on investment by investing in its affiliate management company. By investing in smaller but successful affiliated companies, not only will the parent company profit from their success, but it will also return the invested capital.
Synergies Lead to Greater Value and Increased Performance: Connecting two companies will increase their value. Likewise, both firms can benefit from mutual marketing, financial, and revenue synergies.
The Possibility of Owning Multiple Brands: By creating affiliate companies, the parent companies can own multiple brands since they will own a percentage of their stake. Although this amounts to less than 50%, it will increase its market exposure as well as its revenues.
Saving on Taxes: Affiliation will allow both parent and affiliate companies to receive tax deductions. Namely, affiliated companies can decide either to declare tax on their income individually or through a joint declaration with their holding companies. However, tax deductions may come with certain limitations. In other words, tax deductions will most often be limited to one affiliate company. Managing these financial aspects efficiently can be supported by strong payroll software that files taxes automatically.

Disadvantages of Affiliated Companies

Creating affiliated companies comes with a few disadvantages you should keep in mind. Some of these include the following:

Limited Control Over Decisions: Since parent companies own less than 50% of the affiliated company's stock, they will have limited control over the decisions of their affiliates and their board of directors.
Potential Legal Issues: Cooperation between an affiliate marketing company and a parent company can lead to certain legal problems. For example, when signing a contract, affiliates of the parent company may receive the same obligations and rights as the parent company. However, there are also cases when parent companies are required to comply with the warranties of their affiliates.
Different Criteria: The affiliation criteria may differ depending on the country or regulatory bodies.

How to Become a Company Affiliate

Becoming a company affiliate or affiliate marketer is fairly easy if you know what to do. On that note, here's how to get started:

Decide on Your Niche: The first step you have to take is to decide what kind of products or services you'll sell. Choose the niche you know best. For example, if you are an expert in gadgets and technology, sell tech-related products, such as smartphones, laptops, or wireless chargers.
Create a Platform: Create a website or any other platform related to your niche. The most common website types include blogs, retail listings, product review sites, price comparison sites, and daily deals sites.
Find Affiliate Programs Related to Your Niche: Affiliate programs are platforms where you can find the best affiliate marketing company to collaborate with. All you have to do is create a profile and choose the company you want to promote on your platform.
Sign an Affiliate Agreement: An affiliate agreement is a contract between you and the brand you have chosen. Once you sign the agreement, you'll receive a link from the company you want to advertise.

If someone clicks on that link and buys the product, the company will pay you a certain commission. You can also use affiliate tracking to have a better overview and control of the performance of affiliate links. Some of the highest-paying affiliate programs include HubSpot, Elementor, Moosend, AWeber, and Sendinblue.

Wrap Up: Why Do Companies Become Affiliates?

As mentioned, a company can be defined as affiliated if its parent company owns less than 50% of its stock. But why do businesses take this path? Mainly because of the advantages mentioned above.

Building a partnership of this type can bring numerous benefits, such as tax reduction, expansion to new and foreign markets, additional investment opportunities, and the chance to own more than one brand, i.e., increase the company's capital.

However, don’t forget that affiliated companies can also face certain limitations. For example, parent companies have limited control over the decisions of their affiliated companies. Plus, not all new affiliates will fall under the same criteria, as each country and regulatory body has separate regulations.

So if you’re thinking of becoming an affiliate company, wager the pros and cons and see what they can bring you in the long run.