How to Start a Hookah Lounge

Overview

How to Start a Hookah Lounge

The culturally-rooted tradition of smoking hookah is still alive and well in America today, and hookah lounges create places for smokers to connect over this pastime. Hookah lounges appeal to a wide variety of customers, and opening a lounge of your own can be an exciting business opportunity. With relatively minimal startup costs and the chance to build up a loyal, returning customer base, your venture into the hookah lounge industry can be a financially rewarding one.

Business Overview

Hookah lounges, also called shisha bars or hookah bars, are known for their relaxed, often trendy atmospheres. Customers can go to these lounges to smoke hookah with their friends, often all sharing a single hookah or hooking up multiple lines to a single hookah to smoke simultaneously. Most lounges provide a variety of shisha, tobacco with flavors like mint, fruit, and molasses.

Hookah lounges provide a social setting, and some also feature live music. Many lounges offer teas and some limited food selections. It’s also common for a hookah lounge to serve alcohol. Hookah lounges are common in college towns, and many cater to a younger audience.

Industry Summary

According to Benzinga, the United States is currently home to the majority of the hookah market. As of 2018, the global hookah market reached $130 million, and the market is expected to grow to $210 million by the end of 2025. Hookah sales are largely dominated by 11 manufacturers, which account for approximately 65% of the total sales revenue. Many of these products come from the United States, and Al Fakher Hookahs, Starbuzz Hookahs, and FUMARI are the three top production manufacturers.

Related Industries

Vape shop

Industry Trends

Many trends affect and shape the hookah industry. Mel Magazine notes that increased taxes and regulations are challenging the industry. For instance, new laws in New York required that establishments that serve hookah now must hold a permit, must serve only non-tobacco herbal shisha, and must display signs outlining the health risks of smoking hookah. Previously, many of these establishments that offered tobacco-free shisha were able to avoid indoor smoking law requirements, but increased regulation is changing that.

While these regulations do pose a challenge, the hookah industry is largely thriving. Over the past 20 years, hookah use by younger generations has increased. The social nature of hookah lounges is particularly appealing to younger audiences. These lounges also create an appealing atmosphere during winter, encouraging consumers to come in, stay awhile, and get out of the cold.

The hookah industry is facing a significant challenge in the form of vaping regulations, though, according to Vice. While cities, towns, and states work to ban flavored tobacco products by discouraging teens from vaping, shisha is increasingly being lumped into these laws. Hookah lounge owners and retailers argue that hookah is a cultural tradition and are working to educate lawmakers on the differences between hookah and vaping. However, Massachusetts has already banned flavored tobacco products (though there is a hookah exemption), and other states are positioned to follow suit. These tobacco laws and future legislation could threaten the hookah lounge industry.

Target Market

A hookah lounge may have a varied target market. While hookah increasingly appeals to younger consumers, it’s also rooted in cultural tradition. According to Fumari, hookah has been present in Indian, Persian, Egyptian, Turkish, and Middle Eastern cultures. Traditionally, families, relatives, friends, and even businesses used hookah to connect, relax, and strengthen social bonds. Adults from these cultures are likely part of a lounge’s target market.

Checklist for Starting a Hookah Lounge

If you’re thinking about starting a hookah lounge, it’s important to do your research first. Here is a checklist to help you get started.

Step 1: Write a Business Plan

After coming up with the idea, the next step in starting your business should be to write a business plan.  Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.

Related: How to write a business plan

Step 2: Form a Business Entity

A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a hookah lounge, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
 
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


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Step 3: Choose a Business Name

Finding the perfect business name for a hookah lounge can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Step 4: Select your Location

As the owner of a hookah lounge, you should be prepared to field questions from residents, other store owners, and zoning administrators about the health risks of hookah. Gaining approval to start up a lounge can be a challenge, especially in a more conservative area, so be prepared with facts and figures. Highlighting hookah’s cultural importance can also help, but the public will question your business’s safety both when you start it up and once it’s established.

Rental costs for a hookah lounge will depend on the lounge’s size, location, and available amenities. A retail space located in a high-traffic prime retail area will carry higher rental costs, but it can generate valuable walk-in traffic.

Related: Choosing a business location

Step 5: Apply for Business Licenses and Permits

A hookah lounge owner will need to obtain certain business licenses and permits. These permits and licenses can vary based on the state and town where the business is located.
In addition to standard business permits, a hookah lounge may be required to obtain additional permits from the town, county, or state, giving it permission to provide and sell nicotine products. Verywell Mind notes that these lounges may need to obtain indoor smoking permits to operate and a state tobacco license. Tobacco is regulated by the Food and Drug Administration (FDA) and is subject to both federal and state laws. Tobacco sales laws vary from state to state and, in some cases, from city to city.

If a lounge serves food and drinks, then the business owner will need to hold a food service license, which may require the completion of a food safety training certification course and approval from the health department. If the location serves alcohol, then the business will need to obtain a liquor license as well.

In addition, the are general business registrations that may be needed such as a business license, sales tax permit, Employer Identification Number (EIN), and Occupancy Permit, among others.

Related: Common business licenses, permits, and registrations by state

Step 6: Find Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a hookah lounge is another.  In order to get a loan, the borrower(s) will need to have good credit and be able to personally invest 15-25% towards the total start-up costs.

Related: Finding the money to start a business

Step 7: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 8: Get your Marketing Plan in Place

Marketing costs are important ongoing expenses that can help to bring new and existing customers into a lounge. Common promotion activities include social media marketing, online advertising, print advertising, and radio advertising.

To encourage new and returning customers to visit, a lounge can also establish a referral program or loyalty program.

Related: Low-cost ideas to market a new business

One important marketing task is developing an online presence. A website developer may be out of the budget, but Wix makes it easy for non-technical people to get a website running quickly and affordably.

Step 9: Get Business Insurance

There are several types of insurance to consider when starting a hookah lounge. A few of these include:
– General liability insurance helps to protect the lounge against expenses like medical bills and legal fees that can occur if a customer is ever hurt while on the lounge’s property.
– Commercial property insurance protects the business against losses if the lounge, its inventory, or its equipment are ever damaged in an event like a fire.
– Worker’s compensation insurance helps to cover expenses like medical bills and legal fees that can result if an employee is ever hurt while on the job.

The cost to insure a hookah lounge will vary based on a number of details like the store’s location, the building’s value, and the number of employees. When comparing quotes, look not only at how the premiums compare but also consider the differences between exclusions, coverage limits, and deductibles.

Related: What types of insurance does a hookah lounge need?

Step 10: Hire Employees

A hookah lounge will need multiple employees. PayScale reports that lounge servers make an average of $7.46 per hour, though that pay can range from $2.17 to $12.64 per hour. Glassdoor reports that lounge bartenders earn an average of $20,342 per year. And, according to Salary.com, line cooks earn about $26,242 per year.

A lounge’s budget will not only need to include salaries but will also need to include other employee-related expenses. A lounge may need to cover worker’s comp, unemployment insurance, paid time off, and vacation time for its employees.

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system for your hookah lounge is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start a hookah lounge?

Hookah lounges can often be established in smaller spaces, saving the business owner startup costs. If you’re able to work with a space that was previously a lounge or small restaurant, there should be minimal renovation costs, if any. It’s possible to start a hookah lounge for approximately $40,000.

Some common costs to start a hookah lounge include:
– Furniture
– Building renovations such as ventilation
– Equipment such as a cash register, decor, shelving, etc.
– Hookah pipes and lines
– Inventory (shisha, teas, food)
– Signage
– Working capital to pay the first few months of rent, utilities, payroll, internet, etc.

How much can a hookah lounge owner make?

Hookah lounge profits will vary depending on the location and local demographics. A lounge in an area with a large Middle Eastern customer base may be at and bring in a larger number of customers than a lounge in a location where fewer residents come from a culture that embraces hookah. A lounge owner who strategically chooses the lounge’s location and designs the business to appeal to a broad customer base can maximize their profits and position their business for success.

The bulk of sales will come from hookah and shisha, and a lounge will either charge by the hour or by the size of the bowl. To increase profits more, consider offering additional options, like oxygen, food or snacks, and teas, enhancing a customer’s experience. This improved experience can encourage customers to stay longer and increase per-customer sales. The same is true of offering some retail items, like shisha and hookah supplies, that customers can purchase to take home.

What skills are needed to run a hookah lounge?

Starting a hookah lounge doesn’t require a business degree, but certain skills and advantages can help the lounge succeed.

Hookah knowledge. Knowledge of hookah can help a lounge owner choose quality products and offer lounge visitors an enjoyable experience.

Awareness of trends. A lounge owner who stays on top of current hookah industry trends, like using oxygen with a hookah, can ensure that the lounge offers the experiences and products that are in demand.

Cultural familiarity. Because hookah is rooted in many Middle Eastern cultures, awareness of the nuances and an overall sensitivity to these cultures can help a lounge owner create a spot inclusive of each culture. This can encourage potential customers to visit and provide them with an experience where they feel welcomed and appreciated.

Customer service skills. Experience providing great customer service can help a lounge owner ensure that customers have positive visits and build the foundation for a returning customer base.

Lounge or restaurant management experience. Previous experience working in or managing a lounge or restaurant is valuable. This experience makes a lounge owner aware of processes like inventory management and ordering, and the familiarity with food service regulations and precautions can be an advantage.

Staff management experience. Experience in hiring, training, and managing staff can help a lounge owner find staff who best represents the business.

Are there grants to start a hookah lounge?

It’s extremely rare to find a grant to start a hookah lounge. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.

What is the NAICS code for a hookah lounge?

The NAICS code for a hookah lounge is 713990.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code?

Resources:
National Association of Tobacco Outlets
Tobacconists Association of America

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