Hospitality is one of the hot sectors for young generation in India today. It has the potential to be the driving force behind exponential growth of the economy. Many young entrepreneurs are bullish on this sector and setting up their hospitality business whether it may be establishing a hotel, motel, running a restaurant, tea café, bar cum restaurant, take away facility, cloud kitchen and so on. Some factors contributing to the overall growth of this fast growing sector include the current state of population composition, disposable income, ubiquity of smart phones and vast internet penetration making this an attractive business proposition for the young entrepreneur. This sector contributes around 7 percent to the GDP of India. One can admit that chances of making growth and profits also seems bright in the hospitality sector as the consumption by young population is rising at a very fast pace but this is only one side of the coin as setting up a hospitality business from a scratch and making profit from it is not an easy task as it seems. A person before starting a hospitality business needs to take various decisions regarding the choice of the form of business, choice of location of the project, licensing and registration aspects, land acquisition whether through sale or long term lease, business plan, dedicated team and last but not the least, arrangement of financial resources. Some of the key factors, we are discussing here in brief as under:
1. Structure of Business:
The first and the foremost thing to decide is the structure or form of the proposed business. An entrepreneur has to decide at an early stage, which form of business structure is going to adopted depending upon certain key factors. Therefore, the question before the entrepreneur would be whether to start a proprietorship firm, partnership firm, LLP or a company. Further, whether it would be private limited company or public limited company and which form would suit exactly to the overall objective of the business. Every form of business is unique in its own way and offers both pros and cons due to its peculiar nature. Therefore, the structure should be decided after due consideration to factors like taxation issues, flexibility aspects, recognition of the business structure in business community (trust and transparency), regulatory compliances, costing etc. Depending upon financial resources in hand, the form of business may vary upon factors like who will be partners in the new venture, whether its family owned or outside investors will also play a key role, whether the funds are going to be contributed through internal resources or through some banking arrangement or offloading the equity to PE player etc. An entrepreneur should decide the right structure of the proposed business after considering all the relevant factors. For detailed analysis of each form of business, you may visit here:
2. Legal and Compliance:
Legal and compliance aspect is very crucial for hospitality sector as a lot of regulatory aspects are involved. This segment can further be divided into following broader categories:
(i) Land and Building:
In hospitality business, land and location playa key role, therefore the entrepreneur should be very careful while selecting land and its location. The development of infrastructure is the backbone for the growth of hospitality sector. As setting up of hospitality business requires huge investment of capital nature, the entrepreneur should verify all facts by ensuring that proper legal and technical due diligence is conducted at the time of acquiring the land or undertaking a long term lease.For further details, please read our article “Why due diligence of any property is helpful and inevitable”.
(ii) Statutory Aspects:
Hospitality business needs additional registrations and licenses before or during the process of setting up. Some registration and license requirements need to fulfilled only once during the life of the business and others need to be renewed on a timely basis. Therefore, in order to ensure smooth operation of the business, it is of utmost importance to keep these licenses and registrations updated. Generally, the requirement of the registration and the license depend upon the type, status, class and location of the business which entrepreneur is planning to set up. In addition, statutory compliances which are applicable to all business and corporate houses need to be complied with, which may be related to shops and establishments, labor laws, companies act etc. For compliance including licenses and registrations, please read our article “Licenses and Compliance for Hospitality Sector”.
(iii) Contractual Obligations:
An entrepreneur may need lot of documentation depending upon the size of the business and operational requirements. This may include non-disclosure agreements, operational agreements like facility management, agreement with key employees, vendor/supplier agreement, labor supply agreements, agreement with security service provideretc. For a detailed account of different kinds of agreements depending upon nature of business and sector, please visit here.
(iv) Protection of Intellectual Property:
Additionally, all intellectual properties of a business like the website, trade name, logo, domain etc. are very crucial aspects of every business and therefore, it is always advisable to have these assets registered with the appropriate authority. For different kind of intellectual property and their registrations including peculiarities, please visit here.
3. Financial Aspects:
Setting up a hospitality business requires a lot of funds and therefore, meticulous planning needs to be done to ensure timely availability and arrangements of funds. In today’s business environment, plethora of options are available for financing which can be availed depending upon the business needs, peculiar situation and business philosophy of the owner.
Secondly, depending upon materiality and applicable laws, all financial decisions should be carefully considered from taxation point of view. Similarly all receipt and payment should be well documented in compliance with applicable laws. Therefore, a proper accounting and financial planning should be discussed and finalized with your financial advisor before embarking upon an entrepreneurial journey. A proper financial planning may cover aspects such as funds management, loan repayment aspects, marketing budget, receipt and payment aspects, taxation, invoicing, banking management, financial delegation authority, creditor management and lot more. For indicative financial policies and other aspects, please visit here.
4. Human Resource:
Depending upon the size of the proposed business and management intent, culture and philosophy, a business may need lot of documents from human resource perspective. This may include a proper policy framework ranging from appointment, salary terms, compensation, confidentiality, leaves to sexual harassment policy and exit options after considering industry practice and laws applicable to the business. Additionally, a hospitality business will need few standard operating procedure (SOP) relating to its core functions whether pertaining to client handling, servicing, assets management etc. For different kind of human resource documents, please visit here.
Execution is the key for operational success of any business and a lot depends upon the right framed policies, organizational structure and underlying documentation.As far as hospitality business is concerned, operations may be related to vendor management, IT, infrastructure, stores, reception management, pantry and housekeeping aspects etc.Therefore, every operation outlined above needs a proper policy, standard operating procedure to have right amount of internal control and underlying documentation. Depending upon the size and nature of business, it is always advisable to have right amount of documentation (not very less and not too much) in order to achieve the ultimate objectives of the proposed business.
Please take note this article is for information, knowledge sharing purposes only and offers very precise and indicative reference only and therefore users are advised to take proper opinion/advice from their lawyers/financial advisors before initiating any action. For any clarification on the above, please contact us at__________