How to Start a Hotel Franchise: Costs, Fees, and Profits

Embarking on the journey of starting a hotel franchise is a significant endeavor, given the substantial initial investments required compared to many other industries. Naturally, one of the most integral parts of opening a hotel franchise is choosing the franchisor you want to work with since this will determine the fundamental characteristics of your new business (i.e. what market you serve, the costs associated with operating the hotel, the operating costs, etc.).

Unsurprisingly, there are dozens of hotel franchises that franchisees have to choose from. There are small hotel franchises and big hotel franchises too. There are even hotel franchises owned by other hotel franchises (for example, Hilton hotels have Hilton Worldwide, Hilton Garden Inn, and more to choose from). These options include but are not limited to Hampton Inn & Suites, Hyatt, Holiday Inn, Wyndham Hotels, Motel 6, Days Inn, Super 8, La Quinta, Marriott International, Sheraton, Candlewood Suites, Doubletree, Embassy Suites, Hilton, Howard Johnson, Red Roof Inn, Radisson, Crowne Plaza, Homewood Suites, Staybridge Suites, Hotel Indigo and more! The list goes on and on.

This can make choosing a hotel brand incredibly difficult. However, in an effort to remove some confusion, we are going to cover some of the best hotel franchise opportunities you can currently take advantage of and the basic terms associated with them.

What is a Hotel Franchise and How Does it Work?

We’ll start with a quick overview of hotel franchises and how they work. Hotel franchises – like any franchise business – are a type of business model in which a company, called a franchisor, lends their brand, business plan, product designs, and more with a third-party, called a franchisee. This franchisee uses the aforementioned assets of the franchisor to operate their own branch of the franchise, which is supported by a large network of other third-party groups and individuals running their own branches.

In return for being able to use and profit off these assets, franchisees have to pay the franchisor fees in the form of royalties. These royalties (usually charged as a percentage of gross room revenue) are often all-encompassing or supplemented by additional fees charged by the franchisor. They typically cover many of the expenses incurred by the franchisor as it supports its franchisees. For example, the national brand or franchise will incur expenses for marketing campaigns they run to promote their properties, for the costs associated with maintaining a national website and loyalty program, and more.

Franchise fees, or in this case hotel franchise cost, include both the initial fee to start the business as well as ongoing fees which support costs like those previously mentioned.

What is a Full-Service Hotel Franchise?

Now, let’s quickly establish a working definition of a full-service hotel franchise. Full-service hotels are hotels that provide their guests with a myriad of services and amenities that are not offered by many hotels and other lodging accommodations.

These services include things like turn-down service, daily hotel room cleaning and trash collection, replacing your towels, offering room service, operating a restaurant, providing conference rooms, and more. All of these are considered amenities and/or guest services, and they are what makes a hotel full-service.

In this article, we will be focusing mainly on full-service hotel franchises, however, the level of service required by each naturally depends on the hotel itself.

Some Of The Popular Hotel Franchises

While it is hard to establish a “best” hotel franchise since different franchises work better in different markets and for different franchises, there are a series of franchises that tend to stand out from the pack. We’ll cover a few of these top hotel groups and some of the fees associated with them. If you want to buy a hotel franchise, then this information could be very useful to you.

InterContinental Hotels Group (IHG)

Millions of people across the United States stay in IHG hotels each and every year. In fact, they actually operate a series of hotel franchises under various names, with IHG acting as the overseer of all of them. These properties include Holiday Inn Express, Crowne Plaza, Hotel Indigo, Kimpton Hotels, Crowne Plaza, Candlewood Suites, and more.

This is because of the wide array of offerings they have and the sheer number of properties using their brands across the country, opening an IHG hotel means you will be part of a massive network of franchises. This is beneficial for franchise owners because it means there is already a massive base of IHG customers – many of which utilize their loyalty program.

In fact, IHG is so massive that it has roughly 750,000 guest rooms in 5,000 hotels spread across nearly 100 countries. While some of these hotels are owned and operated by IHG, the vast majority of them are franchises, meaning IHG is a seasoned veteran when it comes to working with franchisees.

Naturally, because of the wide array of properties and brands they have, the startup costs associated with IHG hotels are highly variable. However, the lower end of their initial investment requirement is still relatively high, meaning their franchises are largely out of reach for those who don’t already have significant financial resources. That said, if you have the means to open one, they can be an incredibly lucrative business.

Franchise Fee: $139,284,000

Initial Investment Outlay: Approx. $7,500,000 to $98,500,000

Royalty Fee: 5% (gross room revenue)

Days Inn

Part of the Wyndham Hotel Group, Days Inn is part of a much smaller network than the IHG hotels. However, Days Inn provides affordable and economic lodging that can be offered in almost any market, whether it is a massive city like Los Angeles or a rural town. This makes it a very appealing franchise since it can be operated almost anywhere.

Over the last few years, Days Inn has been expanding internationally through an aggressive expansion program, growing their reach and the breadth of their customers, while at the same time doubling down on their properties in the United States and North America.

With low fees and even lower startup costs, Days Inn is a popular option for individuals who have relatively limited access to capital but who are looking to make a move in the hospitality industry. Plus, their royalty fees are not a burden, coming in at 5.5%, right in line with industry standards. Indeed, Days Inn is a great first property option for a burgeoning small business owner!

Franchise Fee: $233K+

Initial Investment Outlay: Approx. $195,000 to $8,000,000

Royalty Fee: 5.5%

Hampton by Hilton

Hampton by Hilton is a franchise brand owned by Hilton as one of their midscale hotel offerings. With moderate pricing and standard industry amenities, like free continental breakfasts, they are one of the nation’s fastest-growing franchises. They are frequently recognized as one of the best hotel chains with high service standards and strong ratings in cleanliness.

The brand itself includes multiple names, some of which have slightly different amenities and options. These names include Hampton Inn, Hampton Inn & Suites, Hampton Inn by Hilton, Hampton Inn, Hampton by Hilton, and Suites by Hilton.

Similar to IHG properties, Hampton properties require a high initial investment, and their royalties are a little higher than the industry standard of 5%, clocking in at 6%. As such, Hampton properties will require a small business owner with a strong financial background who is able to make a sizable investment in a hotel without seeming overly risky to lenders.

Franchise Fee: $100,000

Initial Investment Outlay: Approx. $7,000,000 to $17,000,000

Royalty Fee: 6%

Red Roof Inn

Similar to Days Inn, Red Roof Inn is an economy hotel that is far more accessible to the average small business owner in terms of the initial investment required to get one up and running. Offering low-cost accommodations, Red Roof Inn has relatively limited amenities and operational expenses, meaning it is a far less involved endeavor compared to many other franchises.

At the same time, Red Roof Inn has been building a strong brand in the over two decades since it began franchising in 1996, and they are known for working closely with their franchisees to meet their needs and ensure that their numerous properties are maintaining their quality standards.

Plus, Red Roof Inn has one of the lower royalty fees in the industry, with a fee of 4.5%. As a result, Red Roof Inn is definitely an option for new prospective small business owners looking to make an entrance into the hotel business. Red Roof Inn, on account of its low barriers to entry, might be the perfect opportunity.

Franchise Fee: $30,000

Initial Investment Outlay: Approx. $200,000 to $5,000,000

Royalty Fee: 5%

Hyatt Hotels & Resorts

Hyatt Hotels & Resorts is one of the most recognizable brands in the nation, offering a number of different hotel options with varying price points for travelers. Over the years, Hyatt has become a frequent stop for the business traveler, known for having properties that offer an array of comfortable amenities throughout the United States. Plus, their Park Hyatt and Grand Hyatt hotels offer travelers a luxury option in some of the premier vacation destinations around the world.

That said, Hyatt is definitely one of the more expensive franchises to open a hotel with. Having such a strong reputation means they have to pay close attention to who is joining their team, and the prices they have set out have created a barrier to entry that only those with prior business experience and proven acumen can actually hurdle. Indeed, they have one of the highest minimum initial investments of all hotel franchises, and at 6% their royalty fee is a little higher than the industry standard.

While these fees are high, if you have the financial means to consider opening a Hyatt, it is certainly a great option for entering the hotel industry at the top with an incredible customer base and strong franchisor to back you.

Franchise Fee: $75,000

Initial Investment Outlay: Approx. $13,500,000 to $20,500,000

Royalty Fee: 5.0%

Understand Your Market

Whenever you are settling on a hotel franchise, you first have to research and understand the market that you are going to open and operate your hotel in. Different hotel franchises are suitable for different markets, and the hotel industry features a variety of luxury, high-end, midscale, and value options, which typically align with the brand name of the hotel.

A good example of this would be deciding between a Grand Hyatt (an upper-end hotel option) and a Motel 6 (a value hotel option). Grand Hyatts are the upper-end Hyatts that you often see in major cities, offering a diverse array of amenities and options. They typically have high operating costs in order to maintain a high level of customer service and satisfaction. Motel 6 on the other hand is a value hotel, focused on providing cheap rates for travelers looking to find a deal and save money as opposed to a hotel with a wide array of amenities.

Now, imagine for a moment that you are looking to open this hotel in a rural area of Indiana, an area with low travel traffic and essentially no tourist draws. Most of the individuals visiting this area are either visiting family or they are in town to meet someone for business, such as a local farmer who grows crops that they buy. Obviously, a Grand Hyatt would never make it in such a place, but a Motel 6 might be exactly what the town needs.

Of course, the prior example was rather extreme, but it conveys the point in stark terms. Whenever you are considering opening a hotel franchise, while it is important to consider hotel franchise fees and terms as well as the quality of their brand, it is equally important to consider the market you are looking to operate in. Indeed, the market you want to operate your hotel in will have the biggest say in what sorts of hotel franchises can actually operate profitably.

Agreeing to Open a Hotel Franchise

As with any franchise business, when you open a hotel franchise you, as the franchisee, sign a franchise agreement with the franchisor. This is a legally binding document that comes with a series of financial obligations. As a result, before signing the dotted line and entering into the contract, it is critical that you have it reviewed by a qualified lawyer. This will enable you to understand precisely what the document is saying, which is crucial if you are going to understand exactly what you will be liable for in the future.

Starting your own business is exciting, especially if you already have the financing set up and are ready to hit the ground running. But don’t let this excitement and enthusiasm blind you in the process. You still have to do your due diligence, even with reputable nationwide franchises, to ensure you understand the details of the business you are opening. Just because it is a Holiday Inn Express doesn’t mean you should just hop into an agreement at a moment’s notice!

Assessing the Financials

Having a strong financial background is not a must to start a small business, but having a certain level of familiarity and being comfortable with analyzing financials, making forecasts, and reading financial statements is still important. As such, if you are considering opening a franchise of any kind, it can be a good idea to talk with an accountant who specializes in dealing with small businesses, as they will be able to help you make sense of the financial aspects of starting a new business. Additionally, as you look to acquire financing, they can help you prepare the necessary documentation and other resources that lenders will require, such as a business plan.

In terms of becoming familiar with these metrics yourself, if you are going to start a small business, it would certainly be a good idea to take an introductory financial accounting course at a local community college. This will equip you with the tools necessary for operating a sustainable and successful small business.

Overview

With dozens of hotel franchises to choose from, the above list only scratches the surface. So, while they are certainly great options, this does not mean you should feel limited to them. The key is to research and analyze and then research and analyze some more. Opening a hotel is a long-term commitment, so you do not want to leave any stones unturned when considering your options. After all, choosing the right franchise, picking the right location and market, and forming the right partnerships can mean the difference between failure and success in running a small business.

Frequently Asked Questions on Hotel Franchises

What are hotel franchises, and how do they work?

A hotel franchise is a business model where a franchisor allows a franchisee to operate a hotel using its brand, operational framework, and support systems. In exchange, the franchisee pays fees, including royalty and marketing fees. This model provides access to an established brand, customer base, and corporate support, making it a popular option for entrepreneurs looking to enter the hospitality industry.

What are some of the popular hotel franchises for small business owners?

Some of the best hotel franchises for small business owners include Days Inn, Red Roof Inn, and Super 8. These brands offer lower initial investment requirements, making them accessible to entrepreneurs with limited capital. Economy hotel chains also have lower operational costs and can thrive in various locations, from urban centers to smaller towns, providing flexibility for new franchisees.

How can I buy a hotel franchise with limited capital?

To buy a hotel franchise with limited funds, entrepreneurs can explore financing options such as SBA loans, private investors, or franchise-specific financing programs. Some hotel brands also offer incentives or reduced fees for first-time franchisees. Additionally, choosing a budget-friendly hotel chain with lower operational costs can help manage expenses while establishing a profitable business.

What are the common hotel franchise fees involved?

Hotel franchise fees typically include an initial franchise fee, ongoing royalty fees, and marketing contributions. Initial fees range from $30,000 to $100,000, depending on the brand. Royalty fees, charged as a percentage of gross room revenue, usually range between 4% and 6%. Additional costs may include reservation system fees and property improvement requirements.

Are small hotel franchises a good investment?

Investing in a small hotel franchise can be profitable, especially in high-demand locations. Small hotel brands often have lower entry barriers, making them attractive for first-time franchisees. Economy hotels like Motel 6 or Red Roof Inn cater to budget-conscious travelers, ensuring a steady customer base. However, market research and financial planning are essential before making a commitment.

Frequent searches leading to this page