Before You Buy a Hotel Business, Answer These 4 Questions

Buying a hotel is no small feat. It’s a competitive venture that offers little room for mediocrity, but it can pay out to anyone willing to do the work. In fact, this slice of the hospitality industry is worth over $200 billion in the U.S.

This is not a life decision to make half-heartedly, so the first question you should be asking yourself before buying a hotel is this: “Am I ready to run my own business?”  

If you can confidently answer this question, then you’re well on your way, and frankly, further along than most.

There are a number of reasons why it might make sense to buy a business, rather than building one from the ground up yourself, but either way, you’ll want to make sure you’re prepared for the investment of money, time, and resources needed to run a business that thrives.

Before undertaking what will likely be one of the most significant professional pursuits of your life, you might have a few questions. So, here are the answers to some of the most pressing ones.

Is the property up to code?

One of the most important initiatives prior to buying a hotel will be compliance. Nothing quashes an enterprising spirit quite like opening a business and then having to shut down due to negligent preparation. This is why the first question you should have answered is whether or not the property is compliant and up to code.

Review local and federal rules and regulations to ensure your facility is in check. Do not take it on good faith that the previous owner kept things copacetic—don’t let another person’s complacency become your liability.

Figure out if any licenses or permits need renewing and re-up inspections that might have fallen by the wayside. This could be for the property itself, but also any equipment or heavy machinery such as industrial-strength kitchen appliances, cleaning equipment, company-owned vehicles, and more.

The key here is to make sure you understand the risks and liabilities that come with purchasing an existing property and business.

What are the pros and cons of buying into a hotel franchise?

One of the most significant decisions you will need to make is whether or not to open a franchise hotel. Prospective buyers should weigh the pros and cons of franchise options, because it’s not always a clear-cut choice.

For example, consider these franchise pros and cons:

Pros:

• Established marketing materials such as ad campaigns, website, and reputation
• Recognizable branding
• Established customer base

Cons:

• Lack of autonomy
• Few opportunities for personalization
• Franchising fees

That final point may be the most prohibitive factor for aspiring entrepreneurs. Franchise fees can quickly offset the initial benefits of owning a franchise, but before you discount this option, consider what these fees entitle you to. Although franchise fees are nonrefundable, the skills you will learn in marketing, management, upkeep, and so on within the context of a franchise are invaluable and can be transferred to new business opportunities down the line.

If you choose to buy a franchise hotel from an existing owner, be sure to inquire about the existing agreement. The agreement may transfer to you without a hitch, or you might need to draft a new contract. Either way, acquiring ownership can come with hidden fees that must be anticipated.

Is the property in the right location?

Travelers and tourists come to destinations for the location, not for the hotel per se. An exceptional stay will certainly resonate with clientele, but no one is packing their bags, leaving the comfort of their home, and hopping on a plane just to stay in a hotel. Your hotel is an extension of the location. It’s the crudités to the vacationer’s entree—not the main course.  This is why great hotels always compliment a great location.

This is when you consider whether or not you want to buy in a highly-traveled area. While areas such as Las Vegas, San Francisco, and New York bring in the most tourists a year, know that high-mileage areas are already saturated with hotels and come with a more expensive up-front cost.

Finding a location is a sliding scale—the more alluring the location, the more you will have to pay for the property. The hospitality industry is a high-risk/high-reward venture, so now is the time to ask where you want to put down roots and how much you are willing to gamble. Whether you’re buying a recognizable franchise or quaint mom-and-pop, the location will certainly be a major success factor.

Demographics: Who are your potential customers?

Finally and most importantly, you need to consider your potential customers. Although it might seem reductive, getting to know your customer base is truly the best thing you can do to promote ongoing hotel success.

Consumer demographics will inform who is staying at your property, why, and for how long. This information is important for determining your target clientele and driving business. When backed by historically-proven consumer data, you can better cater to your customers’ experiences, promote satisfaction, and encourage ongoing loyalty.

There was a time when anticipating your target demo was more or less guesswork. You would have to gather anecdotal information and just hope your business adjustments resonated with your clientele. Luckily, today things are more sophisticated thanks to the Internet of Things (IoT) and artificial intelligence.

Some hotel chains are leveraging IBM analytics technology to collect transactional and customer data into a central repository. This data can then be analyzed to make decisions about room arrangements, amenities, and customer experience services. The hotel industry is just now experimenting with big data, so expect this technology to continue to influence hospitality innovation.

The good news? When you buy an existing hotel, there’s a good chance that the seller has a solid repository of data on their existing customer base. Take advantage of this—but be sure to also do your own market research, especially if you’re planning to rebrand or target a new demographic when you buy the business.

Resources for preparing to buy a hotel business

This is far from a comprehensive list of questions to ask before buying a hotel, but this is a good place to start. Above all else, be diligent and be discerning. When it comes to buying a hotel, doing your homework is the answer to a successful purchase.

Write a business plan

Writing a Lean Business Plan and modeling different financial scenarios is a great way to make sure you’ve thought through every aspect of your hotel venture.

You can download a free Lean Plan template to help you get started. You’ll want to use your Lean Plan as a framework for writing a full business plan if you’re planning to seek financing through a bank or investor. Lenders typically require a traditional business plan. You can see sample hotel business plans in the Bplans gallery if you’re not sure what to include.

Learn more about the hospitality industry

If you don’t have much experience in the hospitality industry, start with learning as much as you can about the industry and running a successful business.