How To Start Your Own Hotel Business
If you’re looking to start a new hotel business, you’ve come to the right place since we’re going to show you exactly how to do it. We’ll start by sharing how to open a hotel step-by-step, then answer some frequently asked questions about running a hospitality industry business and being a successful hotel owner.
Importantly, a critical step in starting a hotel is to complete your hotel’s business plan. To help you out, you should download Growthink’s Ultimate Hotel Business Plan Template here.
15 Steps to Start a Hotel:
- Choose the Name for Your Hotel
- Develop Your Hotel Business Plan
- Choose the Legal Structure for Your Hotel
- Secure Startup Funding for Your Hotel (If Needed)
- Find a Location to Buy or Start Building Your Hotel
- Register Your Hotel with the IRS
- Open a Business Bank Account
- Get a Business Credit Card
- Get the Required Business Licenses and Permits
- Get Business Insurance for Your Hotel
- Buy or Lease the Right Hotel Business Equipment
- Develop Your Hotel Marketing Materials
- Purchase and Setup the Software Needed to Run Your Hotel
- Hire and Train Your Hotel Staff
- Open for Business
1. Choose the Name for Your Hotel
The first step to starting a successful hotel business is to choose your hotel’s name.
This is a very important choice since your hotel name is your brand and will last for the lifetime of your hotel. Ideally, you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your hotel business:
- Make sure the name is available. Check your desired name against trademark databases and your state’s list of registered business names to see if it’s available. Also check to see if a suitable domain name is available.
- Keep it simple. The best names are usually ones that are easy to remember, pronounce and spell.
- Think about marketing. Come up with a name that reflects the desired hotel identity and/or focus of your hotel.
2. Develop Your Hotel Business Plan
One of the most important steps in starting a hotel business is to develop a detailed business plan. The process of creating your hotel business plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to potential investors for your business.
Your hotel business plan should include the following sections:
- Executive Summary – this section should summarize your entire business plan so readers can quickly understand the key details of your hotel.
- Company Overview – this section tells the reader about the history of your hotel and what type of hotel you operate. For example, are you a boutique hotel, a bed and breakfast, or an inn?
- Industry Analysis – here you will document key information about the hotel industry. Conduct market research and document how big the industry is and what trends are affecting it.
- Customer Analysis – in this section, you will document who your ideal or target customers are and their demographics. For example, what is their income level? What amenities do they look for in a hotel? What do they find important when choosing where to stay?
- Competitive Analysis – here you will document the key direct and indirect competitors you will face and how you will build competitive advantage.
- Marketing Plan – your hotel marketing plan should address the 4Ps: Product, Price, Promotions and Place.
- Product: Determine and document what products/services you will offer.
- Prices: Document the prices of your products/services.
- Place: Determine where your business will be located and how that location will help you increase sales.
- Promotions: Determine what promotional methods you will use to attract guests to your hotel.
- Operations Plan – here you will determine the key processes you will need to run your day-to-day operations. You will also determine your staffing needs. Finally, in this section of your plan, you will create a projected growth timeline showing the milestones you hope to achieve in the coming years.
- Management Team – this section details the background of your hotel’s management team.
- Financial Plan – finally, the financial plan answers questions including the following:
- What startup costs will you incur?
- How will your hotel make money?
- What are your projected sales and expenses for the next five years?
- Do you need to raise funding to launch your hotel?
3. Choose the Legal Structure for Your Hotel
Next you need to choose a legal structure for your hotel and register it and your business name with the Secretary of State in each state where you operate your business.
Below are the five most common legal structures:
1) Sole Proprietorship
A sole proprietorship is a business entity in which the owner of the hotel and the business are the same legal person. The owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.
A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a hotel business together. The partners share in the profits and losses of the business.
The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.
3) Limited Liability Company (LLC)
A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a hotel business include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.
4) C Corporation
A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a hotel business is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.
5) S Corporation
An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.
Once you register your hotel, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.
4. Secure Startup Funding for Your Hotel (If Needed)
In developing your hotel business plan, you might have determined that you need to raise funding to launch your business. Determining whether you want to purchase and renovate or build a new structure will majorly impact when you can open your new hotel and the amount of funding you will need.
If so, the main sources of funding for a hotel to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a hotel that they believe has high potential for growth.
5. Find a Location to Buy or Start Building
Having the right space is important for your hotel and choosing the best location can have a major impact on your business.
To find the right space, consider:
- How many rooms will your hotel have?
- What are the zoning requirements for hotels in your area?
- Is the local market a good match for your target customers?
If you plan to build a new structure for your hotel, you will also need to work with architects to establish a timeline and determine construction costs.
6. Register Your Hotel with the IRS
Next, you need to register your business with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).
Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.
Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.
7. Open a Business Bank Account
It is important to establish a bank account in your hotel’s name. This process is fairly simple and involves the following steps:
- Identify and contact the bank you want to use
- Gather and present the required documents (generally include your company’s Articles of Incorporation, driver’s license or passport, and proof of address)
- Complete the bank’s application form and provide all relevant information
- Meet with a banker to discuss your business needs and establish a relationship with them
8. Get a Business Credit Card
You should get a business credit card for your hotel to help you separate personal and business expenses.
You can either apply for a business credit card through your bank or apply for one through a credit card company.
When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.
Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your hotel. You can also use it to build your credit history which could be very important in securing loans and getting credit lines for your business in the future.
9. Get the Required Business Licenses and Permits
Every state, county and city has different business license and permit requirements.
Nearly all states, counties and/or cities have license requirements for hotel, including:
- Business License: A general business license is required for all businesses, including hotels. The cost of a business license varies depending on the state, county and/or city in which the hotel is located.
- Occupancy Permit: An occupancy permit, also called a Certificate of Occupancy, is required before you can open your hotel to the public.
- Alcohol Licenses: If you plan to serve alcohol at your hotel, you will need to obtain the appropriate license from the state in which your hotel is located.
- Sales Tax License: You will need to obtain a sales tax license in order to collect sales tax from your customers.
- Food Service License: If you plan to serve food at your hotel, you will need to obtain a food service license.
- Fire Department Approval: Most hotels are required to have approval from the local fire department before they can open to the public.
Be sure to check local government guidelines to determine which licenses and permits hotels are required to obtain in your area.
10. Get Business Insurance for Your Hotel
The right business insurance is important to protect your new hotel. Business insurance policies that you should consider for your hotel include:
- General Liability Insurance: This insurance protects your hotel business from third-party claims of bodily injury, property damage, and personal injury that occur on your premises or are caused by your business.
- Workers’ Compensation Insurance: If you have employees, you may be required to have workers’ compensation insurance. This insurance protects your employees if they are injured or become ill as a result of their job.
- Property Insurance: This insurance protects your hotel property from loss or damage due to fire, theft, vandalism, and other covered events.
11. Buy or Lease the Right Hotel Business Equipment
Beyond the furniture and equipment you will need in each room, opening a hotel will also require some business equipment, including:
- A reservation system to take bookings
- A property management system (PMS) to manage rooms and rates
- A booking engine if you want to accept online bookings
- Rooms keys and/or access cards
- Reception furniture
12. Develop Your Hotel Business Marketing Materials
Marketing materials will be required to attract and retain customers to your hotel.
The key marketing materials you will need are as follows:
- Website: Likewise, a professional hotel website provides potential customers with information about the services you offer, your company’s history, and contact information. Importantly, remember that the look and feel of your website will affect how customers perceive you.
- Social Media Accounts: establish social media accounts in your company’s name. Accounts on Facebook, Twitter, LinkedIn and/or other social media networks will help customers and others find and interact with your hotel.
- Logo: Spend some time developing a good logo for your hotel. Your logo will be printed on company stationery, business cards, marketing materials and so forth. The right logo can increase customer trust and awareness of your brand.
13. Purchase and Setup the Software Needed to Run Your Hotel
Most hotel businesses need a few types of software to run successfully.
First, you will need a PMS. This is software that helps you manage reservations, check-ins, and other aspects of your operations. Some popular options include Cloudbeds, Oracle Hospitality, and HOTELTIME.
You will also want to have a customer relationship management (CRM) system. This software helps you track interactions with customers, manage customer data, and market to potential guests. Many hotels use programs such as Experience Hotel, Oracle NetSuite, and Salesforce.
Additionally, you need to use accounting software such as Quickbooks or M3 to manage your hotel’s expenses.
Research the software that best suits your needs, purchase it, and set it up.
14. Hire & Train Your Hotel Staff
The quality of your hotel staff can make or break your business. You need to take the time to find, interview, and hire the right people.
Start by writing job descriptions for the positions you need to fill. Then, post the job openings online and in places where potential employees are likely to see them. Once you have a pool of candidates, conduct phone and in-person interviews to narrow down your choices.
Finally, once you have selected the employees you want to hire, provide training on your hotel’s policies and procedures. Additionally, give them a tour of the property and introduce them to other staff members. It helps to build out a strong sales team to prospect new business and nurture customer loyalty.
15. Open for Business
You are now ready to host a grand opening for your hotel. Make sure to include your grand opening event in your marketing plan and promote your hotel launch to the right target audience.
If you followed the steps above, you should be in a great position to build a successful business. Below are answers to frequently asked questions that might further help you.
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How to Open a Hotel FAQs
Is It Hard To Start a Hotel?
Starting any business has its challenges and opening a hotel does require some planning and preparation. The biggest challenges are securing funding for your new hotel, finding a great location to buy or build, and setting up systems that help your hotel achieve operational efficiency.
As with starting any business, having a good business idea, doing market research, and getting support from experts in the industry increase your chance of success.
How Can I Start a Hotel With No Experience?
If you have no experience in the hotel industry, you will need to find a good hotel management company. A hotel management company can help you with all aspects of starting and running your hotel. They will also be able to provide you with the necessary training.
What Types of Hotels Are Most Profitable?
There is no one-size-fits-all answer to this question. The type of hotel that is most profitable will depend on the location of your hotel and what is of value to the market in that area. A boutique hotel might be a huge success in a small city, while a family-friendly hotel could make more money when placed near a theme park. It is important to do market research to determine which type of hotel can be a profitable business in your area.
How Much Does It Cost To Start a Hotel?
Again, there is no one-size-fits-all answer to this question. The cost of starting a hotel will depend on a number of factors, such as the location of your hotel, the type of hotel, and the level of service you offer. You will also have different upfront costs depending on whether you are building a new hotel or purchasing an existing structure.
With regards to building costs or buying an existing property, this varies tremendously based on the type of hotel (e.g., budget vs luxury) and hotel size (e.g., 5 rooms vs 500 rooms).
How Does a Hotel Make Money?
A hotel makes money by charging guests for the use of the hotel's facilities. The amount charged will depend on the type of hotel, the location, and the level of service offered. Beyond charging for guest rooms, hotels may also make money from additional amenities, such as in-house restaurants, room service, and high-speed internet access.
Is Owning a Hotel Profitable?
Owning a hotel business can be profitable, but the amount of profit is highly-dependent on a number of factors, such as the location of your hotel. You can improve the profitability of your hotel by offering a higher level of service, attracting more guests, and keeping your expenses low.
How Much Does a Hotel Owner Make?
Hotel owners, operators and executives receive varied pay amounts based on the success of their hotel. According to Glassdoor, the typical Starwood Hotels & Resorts Vice President salary is $244,472, which is 45% above the national average.
What Are the Key Financial Metrics and Costs in the Hotel Market?
The key financial metrics in the hotel market are as follows:
Industry profit is measured as earnings before interest and taxes. Industry profits have averaged 15.5% of sales in recent years.
The industry’s major expenses are purchases and cost of sales, such as bedding and room supplies. Many hotels also provide meals and liquor, either in individual rooms or in separate restaurants or dining areas.
Last year, purchases were estimated to account for 29.9% of an average operator’s revenue.
Labor is required in many aspects of hotel management, from front-of-house activities, such as front desk, concierge and related activities, to all back-of-house activities, including general management, accounting, marketing, room cleaning and servicing the kitchens, bars and restaurants.
Many hotel jobs have a low skill and training requirement, and employees can be hired on a part-time or casual basis. Because of this practice, many hotels have high staff turnover.
Therefore, there is a constant need for recruitment and training, which can be costly. Some hotel owners and operators have outsourced part of their staff services to specialist staff-recruitment agencies to lower recruitment costs.
Last year, industry wages accounted for approximately 25.7% of total industry revenue.
Rent and Utilities
Rent and utilities on average comprise 7.6% of hotel revenue.
Marketing expenses and royalty fees are another significant cost for those industry participants that operate on a franchise basis. Franchisees typically pay an annual fee of 4.0% to 6.0% of total revenue.
Other major operational expenses include repairs and maintenance, promotional costs, commission paid to agents, bookings and internet fees, accounting and legal costs, motor vehicle expenses, stationery and printing, insurance and other administrative and overhead costs.
Why Do Hotels Fail?
Hotels can fail for a number of reasons, including high expenses and low occupancy rates. Hotels can also fail due when owners misunderstand the market in an area and target the wrong customers or fail to do adequate research into hotel industry trends that impact their business.
Often, hotels begin to struggle due to poor management decisions that negatively impact the guest experience. Closely monitoring your spending and making sure your staff is performing well both go a long way toward making your hotel succeed.
How Big Is the Hotel Industry?
According to IbisWorld, there are 74,372 hotels, and the hotel industry generated $166.5 billion in revenue in the United States alone last year. This represents an annual growth rate of 4.7% over the past 5 years.
Industry profits were $26.0 billion, and wages paid to hotel employees totaled $42.7 billion.
What Are the Key Segments of the Hotel Market?
A hotel is an establishment that provides lodging and, often times, meals and other services for travelers and other paying guests. A motel, on the other hand, provides lodging for motorists in rooms usually having direct access to an open parking area.
A particular hotel or motel can be classified by a number of characteristics, including whether it provides full or limited service, whether or not it is located in a metropolitan area, the state or region in which it is located, its price or rate level, the number of rooms, and whether it is independent or part of a chain operation.
Hotels and motels can also be segmented by room price rates. The establishments with room rates in the highest 30 percentile that are located in local or metropolitan markets are classified as upscale or luxury. The middle 30 percentile is classified as mid-priced, and the lowest 40 percentile as either economy or budget.
Overall, sales from hotels account for 87.4% of industry revenue and 82.0% of industry employment, though they account for only 44.0% of industry establishments.
Hotels that consist of 25 or more rooms provide 83.6% of industry revenue (with 62.7% of industry revenue coming from guest room rentals, 12.5% coming from food and alcohol sales, 4.2% coming from conference and meeting rooms and 4.2% coming from other charges), while hotels that offer fewer than 25 rooms only constitute 3.8% of industry revenue.
Motels provide about 12.6% of industry revenue. The relative proportion of revenue from each of these segments has been relatively stable over the past five years, although motels experienced some growth at the expense of higher-priced hotels during the recession.
What External Factors Affect the Hotel Market?
A number of factors affect the performance of the hotel industry. These drivers include:
- Domestic Trips By US Residents: Trends in domestic travel, especially for business travellers, and the total nights spent away from home directly affect demand for accommodation. As the number of trips made by US citizens rises, demand for hotels and motels to house them increases.
- Consumer Confidence Index: Changes in consumer confidence influence decisions that individuals make concerning expenditure on entertainment and traveling, particularly during a recession.
- Consumer Spending: Consumer spending levels have a direct effect on travel demand. When consumers are spending more overall, they are more likely to spend some of their money on travel and accommodations.
- Inbound Trips By Non-US Residents: Trends in international visitor arrivals and their lengths of stay influence demand for accommodation. A rise in inbound trips positively affects demand for hotels and motels.
Who Are the Key Competitors in the Hotel Market?
As specified above, there are 74,372 hotels in the United States.
The market leaders (in terms of market share) include Hilton Worldwide Holdings Inc. (13.7%), Marriott
International Inc. (13.5%) and InterContinental Hotels Group PLC (7.5%).
The rest of the market is comprised of many smaller players.
Who Stays in Hotels?
Recent demographics show that totel guests are comprised of:
- Domestic leisure travelers: 48.5%
- Business travelers: 24.0%
- International leisure travelers: 14.0%
- Meetings, events and incentive travelers: 13.5%
What Are the Keys to Launching a Successful Hotel?
Starting a hotel requires careful choice of a location and strategy, a business plan, access to considerable financial resources, and a customer service mindset.
1) Location and Opportunity
The location for your hotel is highly linked with the opportunity that you feel there is for your hotel. In the right location, where competitors are not fulfilling all customer needs, a hotel can thrive. However, in a beautiful neighborhood that happens to have heavy competition from existing hotels, success may not be so forthcoming. Likewise, if the neighborhood leaves too much to be desired, you may not be able to price the rooms low enough to encourage travelers to stay at your hotel, even if you are within walking distance of key attractions.
The next step is to know how customers will answer the question “why my hotel?” How will you tailor your services to the customers you want to attract, whether they are families with kids, couples on romantic vacations, businesspeople, or international tourists? Consider the combination of amenities, atmosphere, location, and services that will be right for your customers. Always keep in mind that strategy means making tradeoffs – it is almost impossible to be everything to everyone and succeed. You might have to forgo a certain customer target market in order to make your service offering perfect for your most desired customers.
A hotel business plan is necessary not only for you to think through how you will take on the opportunity, but for you to convince any investor or lender that you have the ability to do so. No savvy investor will be attracted by a lack of planning. There is no excuse to not create a plan with the wealth of information available on writing business plans and even business plan templates tailored to the hotel business sector.
Whether you buy an existing hotel, build one from scratch, or renovate a building into a hotel, you will need millions of dollars to invest. Assuming you do not have this money, you will need to seek bank loans and/or angel investment in your hotel. As you will be working with considerable assets, dependable and experienced legal and accounting help is a must as you create deals with investors.
5) Hospitality Mindset
Finally, you must have an ingrained sense of how you want your guests to be treated so that you can instill this mindset in your top management and they can, in turn, teach this to the staff. Staying at a hotel can be stressful and uncomfortable, and guests demand the highest attention to their needs or they will have no problem complaining loudly and publicly. If employees sense you have higher motives than customer satisfaction, customer service may fall by the wayside and your hotel business may fail or never take off in the first place.
The first step to starting a hotel is to develop your hotel business plan. Growthink provides products and services to help you develop a professional business plan and turn your dream into reality.
Additional Resources in the Hotel Market
For additional information on the hotel market, consider these industry resources:
- American Hotel & Lodging Association: ahla.com
- Hospitality Net: hospitalitynet.org
- Hotel Mavericks: www.hotelmavericks.com
How to Finish Your Hotel Business Plan in 1 Day!
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Click here to finish your business plan today.
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