A hotel with a recognized brand name may be a reassurance to most that their stay will be uneventful. A brand name on the outside of a hotel, however, is not an indication of ownership. Approximately three-fourths of United States hotels operate as franchises and most of the physical hotel buildings are owned by someone other than the hotel operator.
Types Of Hotel Ownership
There are four basic types of hotel ownership and management: franchise, privately owned and operated, leased and managed. A franchise operation is privately owned, but the owner pays an up-front fee to purchase the franchise along with ongoing royalties. A privately owned and operated hotel may have investors or others with a financial interest in the hotel, but the ownership structure is in one person or company’s name. Leased hotels are owned by an individual or company, but normally lease the physical building. A managed hotel is also privately owned, but has signed an agreement with another hotel brand to run the hotel operations.
A franchise hotel operation has clear advantages and disadvantages. While the hotel will benefit from recognition of the brand name by consumers, a proven business model and national marketing, the hotel’s owner is dependent on that brand name for its business. If the brand loses popularity with consumers, the owner’s business suffers as well. In addition, since a franchise is generally limited to the territory it can market in and cannot franchise itself, its growth options are limited to purchasing additional franchises.
Privately Owned and Operated
This type of hotel ownership gives an owner the most freedom, but also the biggest risk. The hotel owner is free to make all decisions on staff, operational structure and growth, but does not have the benefit of a brand behind him. All marketing research and efforts must be built from the ground up.
Leased hotels are also privately owned, but the physical hotel building belongs to someone else. These types of arrangements are generally on long-term leases. The lessor will stipulate a minimum rent for the premises, and may also include a sliding scale based on total revenue for ongoing rent.
While the trend for new hotels is to open as franchises, existing hotels quite frequently go the managed route. This is where an existing privately owned hotel partners with a recognized brand name or smaller, more experienced hotel. The hotel continues to be privately owned, but the managing hotel takes over the day-to-day operations of the business and quite frequently lends its brand name as well. The managing hotel charges royalties based on total revenues.
If you’re an aspiring entrepreneur interested in the hospitality industry, you might consider purchasing a hotel franchise. Since franchises come with a plan for running the business along with support, purchasing one can be a good way to get started in business ownership. However, you should be aware of the downsides in terms of costs, less control, risk and contractual obligations. Consider both the advantages and disadvantages of hotel ownership as a franchisee to decide if it’s right for you.
Startup Costs and Franchise Fees
Expensive startup costs and ongoing fees are some franchise disadvantages that can make it harder for you to get started as a business owner as well as to operate profitably. The initial investment for top hotel chains can run into the hundreds of thousands to millions of dollars. The initial investment includes the initial franchise fee and all other resources – like the building, staff and supplies that are necessary to open your doors. This can cost a lot more than starting a small bed and breakfast or independent hotel, so seeking multiple sources of financing will likely be necessary. Even after you open your doors, you can expect to pay several types of fees for as long as you own the hotel franchise. These can include royalties based on your monthly revenue along with fees for marketing and advertising. Your franchise contract will specify these fees for you.
Less Control Over Your Business
Another one of the disadvantages of chain hotels when it comes to being a franchisee is that you give up a lot of control over how, when or even where you operate. From restrictions on how many hotel franchises can operate in a certain geographic region to what kind of food you serve in your hotel’s restaurants, you’ll need to follow all the franchisor’s rules to avoid breaking your contract. For example, you might find that you can only purchase supplies from a specific supplier or that you have to position your hotel room furniture in a set way. Franchise ownership has less room for creativity since you’ll have to maintain the chain’s brand image. This means having to use the chain’s slogans, colors and any logos rather than your own.
Hotel Franchise Contract
Along with having less flexibility in running the hotel, you are also locked into the franchise agreement, often for a term of several years. If you want out, your contract’s termination clause will explain under what conditions you can exit the agreement. For example, it might allow you to exit if the franchisor does something fraudulent or does not provide you with sufficient training. At the same time, the contract notes under which conditions the franchisor can end the contract with you as a franchise owner. For example, if you can’t afford to pay your fees, or if you try to operate outside the hotel chain’s rules, you can end up losing your business.
Risks of Hotel Franchises
While buying a franchise may be less risky than starting up a new business on your own, this option does not mean that your business will be a guaranteed success. While your business skills will have an impact on how well your hotel performs, the reputation of the franchisor does as well. If the hotel chain is known for poor customer service in general, your franchise may have trouble getting as many guests as you want, even if you personally seek to provide excellent customer service. This means you’ll want to research the chain and read reviews from other franchisees when making your decision. There is also the risk that your franchisor will not provide enough support to help you succeed. While major chains like Choice Hotels provide ongoing support and training to franchisees to help them build their revenue and optimize operations, some others might care more about collecting fees from you than seeing you do well.
Exploring Franchise Hotel Advantages
While there are hotel franchise disadvantages, there is still a lot to gain as a franchise owner. If you purchase a franchise of a top-performing hotel chain that offers great support to franchisees and has a great reputation, you can see good profits. Although you do have less control over the business, this can also mean less stress since you’ll already have a plan for running things. Lastly, you may even find it easier to get financing for your franchise than for a brand-new, independent business.
Difference Between a Dealership & a Franchise
A dealership and a franchise are two forms of conducting business through association with a company that is already established in the market. Both arrangements have a similar aim of saving on start-up costs by dealing with a product that already has brand recognition and, therefore, less consumer resistance. However, there are several differences between a franchise and a dealership.
One of the main differences between the two is how they are run. A dealership is run by an independent entrepreneur, while a franchise is managed by a franchisee. Most business people prefer running dealerships rather than franchises, because they can run the dealership business as they see fit. They are only advised on how to run it by the parent, but they do not have to follow this advice. They choose the pricing for their products and working hours. A franchise represents the company as a whole. This means the managers have to follow all the company’s rules and regulations.
Franchises have to pay their parent companies monthly royalty fees for trading in the brand. In addition to these fess, most franchises also have to pay their umbrella companies a certain percentage of their total monthly sales. The owner of a dealership does not have to deal with so many charges. This allows him to retain more profit.
Initial Start-Up Costs
The charges involved in setting up a franchise are substantial. The entrepreneur has to pay for franchising fees, equipment and other licenses. He also must find a number of people to employ. These employees need to be trained, and this is an additional cost. A dealership owner, on the other hand, does not have to worry about such costs. He mostly incurs the costs of getting the license and purchasing the products.
Another difference between the two is their goals. A franchise has to meet the set targets set by the franchiser (the main company). Franchise owners also are required to buy a fixed number of products from the parent company. If the franchisee does not meet these requirements, he can be shut down by the franchiser. The owner of a dealership sets his own goals. Whether he achieves his goals is up to him.
Obtaining a business license to operate a hotel involves a detailed process, but most state and local governments have simplified the procedure. If you are going into the hotel business, you may need more than one permit. In addition to obtaining state and local licenses, you will likely need a special hotel permit, depending on your area. Follow these few steps to help you get through the process.
• Form a business entity: Your hotel business must have a professional name and operate as an official business. In most states this is a requirement in order to get a hotel business license. Form a Limited Liability Company (LLC). An LLC is a perfect entity for companies that do business with customers at a central location and charge sales tax. Because you will be taking a significant amount of risk by allowing customers to use your facility to sleep and dine, an LLC will allow you to protect your personal assets in the event of a lawsuit. Hotels also have considerable ongoing expenses. By operating as a LLC, you will have the ability to properly account for regular expenses and write-off many of them off, which is often not possible as a sole proprietorship or partnership. An LLC will also allow you to make financial decisions on behalf of your business. Contact your secretary of state for LLC registration forms (see Resources).
• Obtain state license application: Contact your secretary of state to obtain a hotel business license application. In some states, a hotel is treated like any other business. In others, a hotel must meet additional requirements than businesses in other industries. Ask for a list of special requirements for a hotel. Have a copy of the license application sent to you or download it directly from your state’s website.
• Complete state application: You may be required to disclose your articles of incorporation, proof of working capital and banking information and pay a state fee of $100 or more. Have a copy of your business plan and a professional drawing of your hotel’s layout handy. You may be required to furnish this information.
• Apply for a city license: Many cities require hotels to obtain special-use permits and local business licenses. Contact your county clerk’s office to access the proper application forms. You will likely be charged a one-time application fee of $100 to $500. You may also be charged additional fees depending on how many sleeping rooms your hotel has.
• Submit your applications: After thoroughly completing both applications, mail them to the appropriate departments. State applications, depending on your area, are commonly sent to the secretary of state or your state’s department of revenue. Local applications will likely be reviewed by your county clerk or treasurer’s office.
Organizational Structure of a Hotel
Approximately 15.2 million people were employed in the hospitality industry in 2015. From general managers and financial directors to department managers and maintenance staff, each employee has a well-defined role in this type of organization. Hotels require a formal organizational structure to carry out their daily activities. This structure influences all processes and operations. As a hotel owner or manager, it is your responsibility to organize the workforce. An effective hotel organogram can increase work efficiency and productivity. It is important to delegate tasks within and among departments, define the role and functions of each department and be clear about who is doing what. A hotel organogram is an organizational chart that illustrates the structure of a hotel and the role of each department or unit. Basically, it shows how the hotel is structured and how the available positions relate to each other. What this chart looks like depends on the facility. An international hotel chain, for example, will have a more complex structure compared to a local hotel or a small resort.
Importance of a Hotel Organogram
The purpose of a hotel organogram is to clearly describe the authority, responsibilities and duties of each department and its staff. It illustrates who is in charge of what and who is subordinated to whom and makes it easier to monitor employee performance. It also helps employees understand their daily tasks and relation to other employees. Each hotel has a different organizational structure depending on the services provided. For example, a luxury mountain resort may have individual departments in charge of entertainment, spa and wellness services, medical services and more. An organizational chart helps streamline these operations and makes planning easier. It also allows for effective resource allocation and smarter hiring decisions. A hotel organogram may also come in handy if you ever decide to expand your operations. For example, you can use this tool to see how each department performs and identify areas where you could cut costs. Having the right structure in place will help you avoid unnecessary expenses and keep your operations running smoothly while maximizing employee productivity and performance.
Benefits of International Franchising
International franchising, in simple terms, is when a business allows another entity to use its licensed procedures, processes and business model to start their own copy of the existing business in another part of the world. According to this international franchising definition, a restaurant may grant a franchise, including their menu, procedures, style, brand, etc., to an individual looking to start a business or open a restaurant. This can help improve brand visibility, and it should produce extra income for both the franchisee and the franchisor, but how can a business owner decide whether this is the right path for their company
Purpose of Franchising
The purpose of franchising is, at its root, a method of marketing or advertising a company’s goods and services. It can be viewed as a growth strategy, giving the franchisor control over expansion yet limiting their own capital investment since the franchisee takes on that cost and risk. It widens the market and creates a network of outlets that expand the customer base. There are advantages and disadvantages to franchising, both for the franchisor and the franchisee, and franchising isn’t guaranteed to work with all business models.
For the international franchisor, the advantages include worldwide expansion of the business without giving up too much control or requiring extensive capital; the franchisee provides the capital resources needed to start up their franchise. The legal risk is thus lessened for the franchisor, who’s only responsible for the business that contains their own capital. In addition, it speeds up business growth, and the ownership on the part of the franchisee usually results in increased motivation and better staffing. However, not all of the money from the franchised entity will end up in the franchisor’s pocket as the franchisee is entitled to a portion of that profit. There’s also a portion of control that must be handed over to the franchisee, including employment and supply chain, that the franchisor must agree to give up.
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