From the December 2004 issue of Entrepreneur

Starting a business has been your goal for the past year, and now it's time to make this dream a reality. You've researched your market and the viability of your product or service; you even have some startup capital and savings put away until you can turn a profit. You're also leaving your company on excellent terms after years of being a dedicated, conscientious worker. In fact, your skills in your new venture will still be useful to your employer. So it's natural to want to bring your employer along as that all-important first client to get you off and running.

But approaching your boss and persuading top brass to approve such an arrangement requires finesse and careful planning on your part. You have to show how contracting with you will save the company time and money, and why you will do a better job of completing certain tasks compared to how they're currently being handled. It'll take more than just a quick conversation and a firm handshake to strike such a deal.

Timing Is Everything

For Kathy Carrier, 46-year-old president and CEO of Briljent LLC, a Fort Wayne, Indiana, company that does technical writing and training, it took a 30-page written proposal and a 90-minute presentation in front of eight top executives to persuade her former employer to become her first client in a new venture back in 1998. Carrier, who was director of training for a large financial services company and had been there for 15 years, was tired of the corporate life. She had been looking for a business to buy, but nothing seemed to be the right fit. At the same time, her company had a restructuring that resulted in all but six of the 52 people she oversaw in her department being let go.

"They didn't need someone at my level to manage what would barely be a staff anymore," Carrier says. "I suggested they eliminate my job, give me a year of severance, and outsource training to me in my new business. I knew the needs of my former company and this type of work inside and out."

Carrier gave her employer 90 days' notice. She also checked with her employer's legal division to make sure there would be no potential conflict or competition issues. From her days in the training arena, Carrier knew what to charge. Instead of the usual daily fee of $1,000 to $1,500, she enticed her former employer even more by charging a bargain price of just $750. Her former employer even paid her fee in advance to help with cash flow issues during the early days of her business. The relationship got Carrier's venture off to a good start; today, her company has 32 employees and annual sales of more than $2 million.

As with Carrier, timing is everything when approaching your employer about becoming a client. Often, a company will be more open to this kind of arrangement when it's laying off employees. New consulting firms, in particular, lend themselves to this type of work arrangement. In fact, up to 50 percent of such ventures are launched with a former employer already onboard as an initial client, says Michael Stull, director of the Inland Empire Center for Entrepreneurship in the College of Business and Public Administration at California State University, San Bernardino.

"If you're planning to start a business anyway, and you see that your job may be eliminated, this is a perfect time to approach your boss with such a proposal," says Gene Fairbrother, lead business consultant for the National Association for the Self-Employed and also president of Dallas-based MBA Consulting Inc., which advises entrepreneurs. "Make the case that giving you a department to run is cheaper than having it done in-house [because] you don't have to be paid benefits."

Building Relationships

Showing her former employer that it could save money-and get an immediate ROI-Jennifer Carnie, 33, land her first client. Carnie, co-founder of Customer Systems Inc., a 3-year-old Scottsdale, Arizona, computer consulting firm, had worked in sales for a software company for five years. She left on good terms and went to work for another organization that eventually folded. Unemployed, she and her partner, Mike Hoffler-also a former employee of both companies-decided to start their own business. They approached the original software company they had both worked for, which had begun laying employees. After a month of discussions, Customer Systems became a vendor. Today, Carnie and Hoffler, 48, still handle about three to four projects per year for the software business.

"The timing was right for all of us-they needed to farm out projects, and we really needed the work," says Carnie, whose business projects more than $2 million in sales for 2004 and has 15 employees.

If your employer isn't in layoff mode, you may need to make your case a bit stronger as to why now's the time to outsource a certain function to you. Approach your immediate boss about 30 to 60 days in advance of when you intend to leave.

"This is all about relationships. If someone's a great employee and is leaving with a skill that we can use and need at the time, we will be open to becoming that individual's client," says John Reynolds, vice president of HR for Carlson Hotels Worldwide, a travel and hotel conglomerate based in Minneapolis.

Almost 1 percent of Carlson's corporate employees have created such arrangements over the years after they left the company, Reynolds says. He recalls one marketing coordinator about four years ago who persuaded the company that she could handle the task of processing hotel guest room comment cards more cheaply than it was being done inside the company. She had three children and wanted to start her own homebased venture, "She was a dedicated employee who knew our values and our corporate culture, and also showed us how this would make financial sense for us," Reynolds says. "We still work with her today."

Entrepreneur Richard Nicholas, 42, is also a big believer in having such strong relationships. The CEO of E Solutions Corp., a Tampa, Florida, computer services firm with annual sales of $5 million and 24 employees, still has a former employer as a client after seven years in business. Nicholas, a computer systems engineer, and a former business partner had been on a one-year, long term assignment for PricewaterhouseCoopers. Nicholas says that while they enjoyed the work, they'd outgrown their roles, and it was time for them to move on to a venture on their own. So they decided to approach PricewaterhouseCoopers about becoming a client of their new company. "They knew that we could do the job well, and we were a proven commodity," Nicholas says.

Today, this client makes up 5 percent of his customer base of 6,000. (Nicholas' original partner has since left the business, though another partner they acquired at the beginning is still involved.) And, over the years, E Solutions has even become a client to about four employees who left the firm to start their own individual ventures.

The higher up you are in a company, the better your chances may be of clinching a deal. As vice president of property management for a real estate developer in Kansas City, Missouri, Nancy Smith, 44, had gone as far as she would go. While in her position, she'd created an in-house department to screen new employees. She had previously contracted out this function but was never really satisfied with the results. Feeling that she knew this business, she initially met with the president of the company-who also happened to be her boss-to discuss her dream of starting her own employee-screening company. She asked him to eliminate her position, contract the work out to her, and let her become a consultant working with the employees who had formerly reported to her.

"I appealed to him on a personal level," says Smith, president of ACS Data Search LLC in Overland Park, Kansas, which now has 19 employees and projected 2004 sales of $1.3 million. "But I went beyond that and explained how I could save the company at least 10 percent [through outsourcing] its employee-screening work to me."

Client Caveats
Thinking about taking on a former employer as a client? Watch out for these potential pitfalls:
  1. Make sure any agreement you sign spells out whether you're permitted to take on competitors as clients. Large multinational companies typically don't have a problem with this and often anticipate that your client base will include some competitors. But you don't want to wind up with a problem down the road.
  2. Don't rely solely on this one client. Ideally, your former employer should account for no more than 20 percent of your total business, especially once you're on your own for at least six months. Always be marketing to get new clients.
  3. There's a chance your former employer could take advantage of you, since he or she knows your weak points and may try to get extra work for the same price. Don't let this happen.

Getting Started

While a solid relationship and mutual trust and respect are very important to persuading a former boss to hire you for contract work, you must rely on more than just goodwill to solidify such an arrangement. Write a formal proposal-essentially, a business plan-to show your employer what you can offer, why you're the best person to do the job, and just how much money the company can save by outsourcing to you, Fairbrother says. Also show in your proposal how the current need you can fulfill is not being met within the company.

"Since you've been an employee, you have an inside track," says Nan Langowitz, professor of management at Babson College in Wellesley, Massachusetts. "You know the company's strengths and weakness, and you can use this to your advantage as you launch your own business."

Show this written proposal to your immediate boss, and be prepared to do an in-person presentation, if necessary, to that person and perhaps a layer or two of management above that. "A presentation should be totally professional-with handouts and lots of number crunching," adds Fairbrother.

Any mutual agreement between you and a former employer should be made in writing. Don't be tempted to be satisfied with a verbal OK just because you feel an added level of comfort with your ex-boss and former colleagues. The written agreement should spell out your obligations to your client, what tasks and assignments you'll undertake, how many hours per month you'll work, and what materials your ex-employer will furnish to you, says Dennis Haase, a Service Corps of Retired Executives counselor and attorney in Hot Springs, Arkansas, who works with small businesses. The contract should state your fee, when you will be paid each month, and what kind of notice both parties will need if the arrangement is cancelled.

As long as all parties understand their responsibilities, bringing on your former employer as a first client can help smooth your transition into entrepreneurship. Says Haase, "The situation can be just great for everyone, and you'll be well on your way to building your business, with your first client already in hand from the get-go."

Exit Strategy
How you act before you leave your company is just as important as what you do once your business is started. Barry Merkin, clinical professor of entrepreneurship at the Kellogg School of Management at Northwestern University in Evanston, Illinois, offers some recommendations for how to make your employer your most willing inaugural client:
  1. Give them your all. Do a great job during those last six months on the job, so your boss's final impression of you is as good as possible.
  2. Don't compete. If you'll be competing with your employer in any way, the new arrangement is not going to work. Be upfront about competition issues ahead of time.
  3. Think twice. If you're starting a business where it makes perfect sense for your employer to become a client (such as a consulting firm), you're leaving with a lot of goodwill and handshakes, and you can save your employer money-yet your employer is still hesitant about signing on as a client-rethink your business strategy. Maybe you need to shift the focus or emphasis of your startup to something more marketable.

Laura Koss-Feder is a freelance business and features writer in Oceanside, New York, who has written for BusinessWeek, The New York Times and Time magazine.