IAMCP Profiles in Partnership

Anthony Carrano: 00:05

If the AI models your company uses are increasingly available to everyone, what actually makes your Microsoft partner business defensible and more valuable to a buyer? And if you wanted the option to sell your company eighteen to twenty four months from now, what would you need to start changing today to maximize its value? Those are the questions we're tackling in part two of our conversation with Tim Mueller. Because in an AI first Microsoft ecosystem, the technology alone isn't the moat. The real value may be in what you've built around it, your vertical expertise, proprietary workflows, customer relationships, security capabilities, reoccurring revenue, marketplace strategy, and your ability to scale the business without simply adding more people.

Anthony Carrano: 00:50

Today, we're getting very practical about how Microsoft partners can build a business buyers want to acquire. Welcome to IAMCP Profiles in Partnership, the podcast that showcases how Microsoft partners and IAMCP members grow their businesses through collaboration across the Microsoft ecosystem. I'm your cohost, Anthony Carrano. And in each episode, we talk with innovative partners and industry leaders about the strategies, relationships, and market shifts shaping the Microsoft channel. Today, we're continuing our conversation with Tim Mueller, managing partner and cofounder of IT ExchangeNet, a global M&A consultancy specializing in advising sellers of MSPs, MSSPs, VARs, and other technology businesses.

Anthony Carrano: 01:36

In part one, Tim explained how AI is changing what buyers measure when evaluating Microsoft partners from revenue per employee and gross margin scalability to repeatable IP, higher quality reoccurring revenue, and AI driven growth. Now we're turning that discussion into an actionable playbook. We're gonna explore where the defensible moat exists for an AI first Microsoft partner, why deep vertical specialization can increase acquisition value, why security is becoming foundational to valuable AI practices, and how Microsoft Marketplace can potentially strengthen your route to market. And then we'll bring it all together with a practical question every Microsoft partner owner should consider. If you wanted the option to sell your company within the next eighteen to twenty four months, what should you start doing today?

Anthony Carrano: 02:27

Let's jump back to our conversation with Tim Mueller.

Rudy Rodriguez: 02:31

Tim, where is the defensible moat for an AI first, you know, Microsoft partner? If foundational AI models are increasingly commoditized, what intellectual property actually creates acquisition value for a Microsoft partner?

Tim Mueller: 02:46

You know, you're right about that. The foundation models, so for example, OpenAI, the parent company of ChatGPT, with whom Microsoft has a strong relationship, you have open foundation models like Anthropic or other SLMs, those are commodities. And the moat lives in what we'll call domain specific orchestration of the IP, right? So that means you have vertical integration blueprints. So those are kind of pre built connectors and schemes that the map specifically of an industry data.

Tim Mueller: 03:21

So you're looking at going into like health care EMR or community banking compliance. So these are pre built connectors within these verticals. Manufacturing logistics might be another example that can go directly into the Microsoft Fabric and even Copilot Studio. So vertical integration blueprints are one of them. The second is the Agentic workflows.

Tim Mueller: 03:45

So that's when those multi agent architectures come in through kind of an automate specific end to end task. So think kind of a statutory regulatory audit prep, right? So they'll come in, and these are experts writing these domain experts in the verticals. And by the way, we think those are valuable companies. When you have deep three inches wide, five miles deep expertise in a vertical, particularly with AI, because buyers are now looking at those, whether it be healthcare, IT, or you know, banking, financial, because that means that you have focused and you've become the very best at developing open or any kind of AI IP on that.

Tim Mueller: 04:33

So I would encourage some of these Microsoft partners that say, god, we need to get wider and not so be so dependent in this one vertical, we're finding high multiples for those that have perfected it. And then the third one is kind of proprietary deployment tools. So scripts, security government templates, any kind of deployment automation. So those are the things that are capturing the multiple in what typically had been kind of a fixed priced value. And let me talk about that for one second.

Tim Mueller: 05:07

In the past, and we've been doing the Microsoft partner deals for fifteen years, we could typically kind of wet our thumb, look at a business and say, that's Microsoft partner six and a half to seven and a half text x multiple, right? Because all the offers are usually multiples of your adjusted EBITDA. So we'd be able to kind of thumb it and say 6.5 to 7.5 x and be right within a margin of error. But now because of the way that these buyers are being particular, there are a lot more buckets they're looking at, and therefore, instead of kind of looking at it and saying, yeah, roughly 6.5 to 7.5 x, They're looking at blended valuations based on the strength of maybe vertical expertise, or what your annual recurring revenue is, or your repeatable AI tools. And each of those have a weighted multiple on what they're doing with it.

Tim Mueller: 06:11

And so therefore, valuations are becoming a lot more intricate, and it's a lot harder for guys like us to make a commitment to a seller and what we think the company is worth.

Rudy Rodriguez: 06:22

So, you know, one of the things we're seeing, you know, messaging from Microsoft, and Microsoft is really making security foundational to AI adoption. Does that change cybersecurity from a separate practice into a requirement for virtually every valuable Microsoft AI practice?

Tim Mueller: 06:42

Yeah, that's really insightful. And the fact of the matter is buyers will discount AI practices that lack a deep security credential. I'm going to say that one more time. The buyers will discount every AI practice that lacks a deep security credential. So if an AI consultancy deploys Copilot without security permissions or sensitive AI and financial records leak across an organization, bad news, right?

Tim Mueller: 07:14

So the highest valued partners will build their AI advisory on top of a Microsoft security stack from day one. Otherwise, not only will give you a discount, but they may turn their back automatically and say the risk is too high for us post sale. Right? Because now we just bought this company that doesn't have the AI practices sitting on a security stack, and there's only so many reps and warranties the seller can make and be responsible for, for the bad guys getting in post sale and absolutely killing the reputation of the buyer. So more than ever, Rudy, to your point, is that every single company that has an AI practice has got to have that security buttoned down.

Rudy Rodriguez: 08:00

All right. So looking at Microsoft's fiscal '27 priorities, which are AI business solutions, cloud, you know, AI security, their marketplace and co sell. What Microsoft incentives do you believe will have the greatest impact on partner valuations over the next few years?

Tim Mueller: 08:20

So it's interesting because you have different types of clients, right? You've got the SMB, small business. You have the middle market, which really comprises most of the spend cumulatively, and then you have the enterprise clients. Now, the enterprise clients have been gifted massive cloud commitments and they're so desperate to spend that on pre allocated in Azure budget, right, on third party software, package services, things on that line. So partners whose offerings can be transacted directly through the Azure marketplace will give buyers that instant sales channel into, let's say, that Fortune 1,000.

Tim Mueller: 09:04

So I look at enterprises kind of being that Fortune 1000. And it drastically reduces customer acquisition costs because if you can have everything go through Azure Marketplace, it doesn't take nearly as much to get the customer to become a customer and then it compresses that sales cycle from months down to days, Right? So that's where that Azure Marketplace transactability, if that's a word, right, is tied to the Microsoft Azure consumption commitment. And that's where, truthfully, that's where this growth is going to help these Microsoft partners. Even if you're in the middle market and you're not in that Fortune 1,000, that whole Azure marketplace is going to be a net benefit for partners.

Rudy Rodriguez: 09:52

Okay. So, you know, having gone through MCAPS recently, we see Microsoft is putting so much emphasis on agents. What does an Agentic Microsoft partner look like to an acquirer? Does the value reside in the technology, the IP, the implementation expertise, the customer relationships, or the repeatable business processes the partner has built? Or all of the above.

Rudy Rodriguez: 10:18

Right.

Tim Mueller: 10:19

You know, through through it all, and I think a lot of the AI supporters and pundits, I mean, everyone will agree that people still buy from people. Right? So the relationship that you have with your customer or your customer's boss who's making that final decision. So I think the true value of all this resides right at the intersection of repeatable business process and the customer relationship. That's where the sugar, that's where all the nectar is.

Tim Mueller: 10:52

And so technology changes rapidly. So an agent that is built today might be refactored next year. So buyers kind of really assign that top value to partners who have been able to unlock the business workflow within a client. And it takes a lot of courage for the client, the customer, to say, I'm okay with building an agent today that we may have to bulldoze next year only because business is moving so quickly and the technology is there. So they understand that the client's operational pain better than anyone else, And they'll design kind of a multi agent logic that runs through all those workflows.

Tim Mueller: 11:35

So again, people buy from people. If you trust that we are going to stay up with the technology and you can accept the fact that we may completely wipe out the work that we had done this year for something different next year, which had never happened before, right? It always been, hey, how do we bolt on to that platform that we built five years ago or ten years ago? But what they're seeing today is if you keep bolting on to the technology as it grows, it's like a ball that's rolling downhill that you then adhere another ball to, all and of a sudden it goes cattywampus in a different direction, then you hear another ball to it, and all of a sudden you have no idea where it's going. And that's where I think the courage for clients and customers to be able to say, we are not gonna bolt on balls onto the major ball.

Tim Mueller: 12:25

We might just reinvent the ball again, only because how quickly code and technology is moving that allows them to do that.

Speaker 4: 12:34

So Tim, this has been excellent. Always just the amount of insights and perspectives are really great. And for kind of these next, you know, two questions as we kind of close out, just to really bring it home for, especially with IAMCP partners who'd be listening, be thinking about, who'd want to, you know, you know, sell their business and, obviously, definitely wanna utilize, you know, IT ExchangeNet. And and some of these things, feel like you... You've kinda covered it, so it might be a way to summarize and encapsulate it, and and making it real.

Speaker 4: 13:07

Like... So if, like, two Microsoft partners each have, you know, like, a $10,000,000 in revenue and identical EBITDA, what could make one worth 30, 50, or even a 100% more, you know, than the other one today?

Tim Mueller: 13:22

You know, I I... This is really what the buyers or what what your your listeners wanna hear. So this might be one of the most important questions on how do I get the highest valuation, particularly for those members, we'll call them the silver tsunami, right? So over 65, have built their business over twenty five, thirty years. They don't have a management team with the cash to do a leveraged buyout, and they don't have kids that are interested in taking over their business.

Tim Mueller: 13:52

So purely by talking with their financial planners or their actuarial table, they're forced to sell at some point because it's either sell or wind down the business and just walk away. So I think a lot of these people are saying, what is the big difference in there? And we could see as much of a 2x spread in valuations based on four different items. So the first one is revenue mix and gross margins. So a lot of this is gonna be repetitive from earlier in our discussion, but I think it's worth the repetition.

Anthony Carrano: 14:26

Yep.

Tim Mueller: 14:27

So the first thing is revenue mix and gross margins. So firm A has 75% recurring revenue and 60% blended gross margin, right? Firm B has 30% recurring revenue, but a real heavy CSP pass through and low margin billable staffing, right? There's no doubt that one will be much stronger than the other because the recurring revenue still matters, but that blended gross margin, let's say it's managed services or advanced security or AIOps, that will always be a big win versus the one that has, let's say, lower recurring revenue and kind of a CSP pass through. Number two is customer and vendor concentration.

Tim Mueller: 15:17

Firm A has a customer with, let's say, 10% of revenue and generate its own sales pipeline, but firm B has 35% of its revenue tied to one client and relies on a single Microsoft PDM for all their leads, right? Firm A is going to get maybe even a 2x multiple on that. Number three is kind of delivery leverage. So firm A produces, let's say 2 and 50,000 in revenue per technical head, but firm B produces $140,000 per head in manual hours, right? So when we talked earlier about the revenue per employee and some of that matters if you're paying a high end consultant $2.50 a year versus someone that's at 100 ks a year, all that matters But really we're looking at like how much revenue per employee with strong profitability can you have out there so that delivery leverage is the third one that buyers will look at.

Tim Mueller: 16:17

And then the fourth one is really management depth. So firm A operates without the founder handling to day, handling day to day. So the more that the founder can extract themselves from day to day and say, you know, my role has become more about visionary, making sure that we've got enough money, making sure that we've got good culture. They're going to be so much more valuable than a founder that has the primary customer relationship and is kind of a chief rainmaker. I know that sounds like the statement of the obvious, but the more that your Microsoft owner operators can extract themselves out of the top relationships and overseeing all the delivery, the more value they'll be and the faster they can exit from their business after they sell.

Anthony Carrano: 17:09

No, I love it. Thank you for that breakdown. And the thing I really appreciate about that, Tim, is that even in the midst of all these changes and all the numbers and the technologies and the things that are kinda thrown out there, the four things, as I was hearing you, it just I just just chatted a note here saying, look, it's much of the... Because you talked about scalability and repeatability, you know, like throughout the... You know, throughout our time together, but how much of that do you control?

Anthony Carrano: 17:39

Right? And the more of that as the as the business, you can either control or can exert influence over the better, you know, rather than outsourcing that out through through one through one avenue or another. So really appreciate that. So as we kinda wrap up then, so let's say I'm a, you know, I'm a $5,000,000 to $15,000,000, you know, Microsoft partner, or that same... That $10,000,000, you know, partner, and I wanna have the option and not necessarily the obligation to sell in eighteen to twenty four months.

Anthony Carrano: 18:14

What are the five things I should, you know, start, should start doing right away in priority order?

Tim Mueller: 18:21

You know, and Anthony, I'll send you this because you you did give me a heads up on this question, and I wanted to make sure that I was really specific for the sellers. And I'll send you this list of the five if you wanted to post it in the notes along with this. But number one, first and foremost is you need to audit and cleanse the recurring revenue base, right? So there's a difference between recurring revenue and annual recurring revenue.

Tim Mueller: 18:51

So recurring revenue is looking in the rearview mirror and saying every year we've had this contract re up and we keep doing it. Annual recurring revenue is looking forward and telling the buyer, we have a three year contract we just signed last week that's going to last for the next three years. And what that does, it mitigates the risk for buyers to know that the company that I'm buying is going to have this revenue unless we really mess up and we get knocked out, we're going to have that revenue. So, but in that cleansing, you've got to be able to convert these one off projects into multi year managed services or cloud optimization contracts. You got to do that.

Tim Mueller: 19:35

And so push that recurring revenue past 70% of gross margin, not just top line revenue. So revenue is great, but those gross margins will get you the higher multiple. So number one was audit and cleanse recurring revenue base. Number two is package up that repeatable IP and workflows. So if you stop selling customized work with a blank slate hourly consulting and you start to standardize the solutions into a discrete offering, let's say it's a fabric data migration, or let's say it's an Agentic Copilot workflow integration, or Purview governance.

Tim Mueller: 20:17

Any of those that I'd mentioned earlier in our discussions that could be delivered by immediate staff that are using these internal templates, buyers are going to look like this and go. We could take this now and give it to every one of our engineers and our account executives to sell over and over again. So that's number two is package that repeatable IP and workflow. Number three is to eliminate customer and founder concentration. We just addressed this one.

Tim Mueller: 20:46

So no customer account more than 12% to 15% of your gross margin and transition your founder out of day to day technical delivery or even out of account management. Number four is to align direct metrics with Azure consumption, right? So establish that clear tracking that connects your delivery of Azure consumption as they look to burn it down. And so build at least one transactable offer in the Azure marketplace to demonstrate that you can do the enterprise co sell readiness. Because oftentimes, even if you're a smaller partner, you might be acquired by, you know, Accenture, KPMG, I mean, these guys will oftentimes swim downstream if you've got some direct metrics with Azure consumption and repeatable AI tools.

Tim Mueller: 21:42

So make sure that you have at least one of these transactionable offerings in the Azure marketplace to pique their interest. And the final one, which is number five, is get your financials diligence ready. So in the sports world, that's kind of getting in position to be in position, right? So do all the training ahead of time, do your reps, do everything else to be ready for that game. So you want to kind of move from cash or modified accrual counting to more formal GAAP.

Tim Mueller: 22:18

Now not every buyer is going to be able to have you with GAAP accrued financials and most of the buyers don't expect you to be audited, but if you are more formal gap like, that will increase your transaction value. So you're going to clean up your discretionary expenses, maybe separate personal add backs more intently. You know, every single seller we have will have personal expenses run through a business, and those, to their benefit, can be add backs in the adjusted EBITDA because the buyers look at it and go, hey, we know the IRS is fine with you doing this. We're not gonna pay for the car anymore. We're not gonna pay for the Yankees tickets anymore when we don't believe or think that that's strictly for business.

Tim Mueller: 23:06

You might have landed a few really big deals during the season when you went to the Yankees game or the Red Sox games, but we're not gonna pay for your season tickets anymore. Those go into your adjusted EBITDA. So if anything, spend $10 now and do kind of a informal quality of earnings, a Q of E, on your financials so that you are in position to be in position for a sale.

Anthony Carrano: 23:33

Excellent, excellent. And now, Tim, what are some of the best ways folks listening to reach out and either connect with you and IT Exchange Net?

Tim Mueller: 23:44

Yeah, thanks, We are IT ExchangeNet, so it's www.itexchangenet.com. We're in a lot of the IAMCP materials on their US and global site. So just a pleasure working with all of the partners through that IAMCP partnership. And then certainly I would encourage people to take a look at some of the articles that we post in LinkedIn because we do this in mind of getting people prepared for a sale or telling people where the market is today. And, you know, the note that we started on the very beginning is that we were really bullish about 2026 and here we are sitting in September.

Tim Mueller: 24:29

I can't believe how fast that's gone, but we're equally bullish about what we're going into for 2027, mostly because these buyers can't afford to just grow organically. And their only choice, their only option is to grow by acquisition. And we need more sellers. Our buyers keep saying, keep filling your pipeline. So the the the environment is there.

Anthony Carrano: 24:56

Excellent. Excellent. Well, Tim, as always, thanks again, and, we'll see you soon.

Tim Mueller: 25:02

Thanks, Anthony. Good to see you, Rudy. Thank you both.

Anthony Carrano: 25:06

Wow. That was another just great interview with Tim. I mean, he always brings so much perspective and just relevant insights for the Microsoft, community.

Rudy Rodriguez: 25:18

Oh, absolutely. And if, you know, if you're looking to sell your business, you really need to listen to to this because there was so much information that it was hard to keep up. It was hard to keep up with them.

Anthony Carrano: 25:30

Well, the thing too, I I... Mean, there there are several things. I know one that I really appreciate because, you know, as as you know, as we work with our own clients who are trying to, you know, engage in the co sell relationships, you know, with... Or co sell relationship in motions, you know, with Microsoft. But just how it's important that, look, if you're looking to to sell...

Anthony Carrano: 25:51

And I thought those... The guidance that he gave with the stress test, he said, look. If your co sell was cut by 50% tomorrow, what does that do to your profitability? And, you know, talking about, you know, you know, how much of your EBITDA, you know, is relying upon, you know, the incentive program. So just although it's like as important as it is to...

Anthony Carrano: 26:12

You could take advantage of those co sell opportunities and all the incentive programs and getting the referrals from Microsoft, how it's also just equally important that you have to be building up, you know, your business in the areas of... You know, that you can directly control and influence if you wanna be positioned to sell. So I really appreciated those points.

Rudy Rodriguez: 26:32

Yeah. You know, the the one thing that he mentioned was really how how people get get evaluated today as well. And they look at revenue per employee, they look at gross margins, he talked about cleansing your financials, you know, cleansing your your recurring revenue. And don't just depend on the CSP licensing that takes place. He talked an awful lot about that.

Rudy Rodriguez: 26:55

And, you know, all the things that are going to important be important, and, and, you know, packaging your repeatable workflows. So there was... It just went on and on, and it's really... I hope people really listen to this. You may wanna listen to this this session a couple of times because there's a lot of valuable information.

Anthony Carrano: 27:13

Well, I figured I know the the account the account in you, your ears probably perked up when he talked about, especially about the financial, you know, due diligence and and the audits and whatnot. And I'm just curious actually that just ask you, Rudy, because I know, obviously, know, you've been in business, you know, quite a while. You've, you know... I've seen both in tech, but also in your accounting. I mean, when he was just talking about in the midst of despite all these changes, all these advancements, all these technologies, all this stuff that's happening, but how he hit on those two key metrics.

Anthony Carrano: 27:46

Right? What it... I mean, what did that... You know, is that... That's...

Anthony Carrano: 27:50

Is that stuff that was... I shall... Shall I say... I don't know how to ask this question. Was that relevant back then as it is as it is today?

Rudy Rodriguez: 27:59

It absolutely is. And and to the point that you're making, it made my chili hot. It's a phrase I like to use as you'd well know because it it is important. You know? I I learned this from one of my bosses long time ago at ADP.

Rudy Rodriguez: 28:15

It was wrote how important revenue per employee was, what gross margins were, how we managed our business. And it's come full circle. It's come full circle. It's different because now even a small business has to manage itself like a large enterprise does. And you have to be thinking of those things, especially if you're looking at selling your business, you have to take those things very, you know, think of those those metrics very importantly, because it's it's it's what drives your business.

Rudy Rodriguez: 28:43

And and it's no longer a transactional type business. It's all into recurring revenue. And that's so important. And that's how you're going to need to manage your business and control your expenses. And the opportunity there is for people to really...

Rudy Rodriguez: 29:01

That he he drove home in this interview, driving home, increasing your gross margins.

Anthony Carrano: 29:07

Yeah. And I hope too that folks really take heed of where he was, you know, really hit on just the difference between that you're truly building, you know, AI capabilities versus just kinda adding AI, you know, to your story. Right? And just cutting, you know, through the fluff, right, and making things that are, you know, substantive, you know you know, operationally. Right?

Anthony Carrano: 29:32

And how buyers are... They're discerning that. So it's not like, you know, you know, twenty some odd years ago during when there was all the .com hype. I mean, there's... People kinda, you know, suffered, you know, some of those pains and pains of all the different hypes, but they're looking for what is actually, you know, sustainable, what is scalable, what is repeatable, you know, when it comes to, you know, how AI is impacting businesses.

Anthony Carrano: 29:54

And so I hope folks really take that to heart. I know also just at the end where you talked about, you know, the five things that if someone's wanting to look to sell, you know, over the next eighteen to twenty four months, what are five key things? And I know you touched on a couple of them here in this recap, but we'll have that list of those five things in the show notes so folks can kinda grab those as well. So once I really, really enjoyed, you know, our time.

Rudy Rodriguez: 30:18

Yeah. It's it's always great talking with Tim. Thank you for joining us on this episode of IAMCP Profiles in Partnership powered by Dunamis Marketing. I know I certainly enjoyed this podcast. I...

Rudy Rodriguez: 30:29

We hope you enjoyed this podcast and find it useful and inspiring. If you did, please subscribe, rate, and review us on your favorite podcast platform. One of the best ways to partner for success is to join IAMCP, a community of Microsoft partners who help each other grow and thrive. IAMCP members can find and connect with other partners locally and globally and access exclusive resources and opportunities. Whether you're looking for new customers, new markets, or new solutions, IAMCP can help you achieve your goals.

Rudy Rodriguez: 31:01

To learn more, visit the website at www.iamcp.org.