The Future of M&A in the Microsoft Ecosystem: Insights from Tim Mueller
Welcome to this episode of our podcast, Profiles and Partnership, where we delve into the ever evolving landscape of M&A within the Microsoft partner ecosystem. Joining us is Tim Mueller, an industry trailblazer whose insights into high profile acquisitions and strategic transformations are unmatched. As AI gains momentum and cloud services redefine enterprise modernization, Tim brings a wealth of expertise to help us unpack the latest trends, challenges, and opportunities shaping the IT services space. But before we get started, let's ask ourselves a few questions. How does a cutting edge AI tool transform M&A and valuations?
Anthony Carrano:And can niche specializations like cybersecurity make or break a deal? And what about the human factor, the certifications, the partnerships, the customer relationships? Today, we're not just scratching the surface. We're diving deep into these pivotal questions with Tim Mueller, M&A managing partner and co founder of IT Exchange Net, to understand how technology and strategy converge to drive success in acquisitions. A little background about IT Exchange Net.
Anthony Carrano:They are a leading M&A marketplace exclusively for mid market IT businesses, connecting a global network of over 85,000 qualified buyers with established IT enabled companies. So whether you're a Microsoft partner, a private equity firm, or just fascinated by the tech world, this episode will keep you on the edge of your seat. And now to our interview. Well, Tim, welcome back to the podcast. We're really excited to have you back on.
Tim Mueller:Anthony and Rudy, it's good to see you guys again. It's probably seven or eight months since we last spoke and I really look forward to these interactions because it's a lot of good information, not only about the Microsoft ecosystem, but also what's happening in the whole IT services side. So thanks for having me back.
Anthony Carrano:Absolutely. And on that note, let's dive right in. Let's talk about, you know, what are some recent high profile M&A deals among Microsoft partners that you see are setting trends? You know, what's changed since our last conversation?
Tim Mueller:Yeah, so I'd like to talk really about the Navisite acquisition by Accenture. That was in 2024, but we're now starting to feel the effects of it because I think there's a little bit of kind of follow on activity. If you guys recall, Navisite, they had close to 2,000 certifications, 1,500 employees, but of that, there were more than 400 cloud engineers. And what that does for a company like Accenture and other larger acquisitions is it allows them to scale a little bit more, both the application infrastructure managed services. That managed services means recurring revenue, but the cloud engineers allows them to start doing some skunk work projects with AI to be able to use Copilot in a more effective way.
Tim Mueller:There's still a lot of question marks on how do we make money on Copilot and the ability to now customize the use of it for their larger and even mid sized middle market customers is really important. So I really like what happened here with that acquisition. I think what it does is that there still is very much an urgency to modernize the enterprise. And what we're seeing across the board now is Accenture and others like that are making those moves to fortify the personnel to do that. It's always great to get the revenue that's associated with the M&A, but the people part of this one, I think makes it much different.
Tim Mueller:So how that changes from the last time we spoke is that AI in particular continues to gain more momentum, a lot less vaporware of what it coulda, shoulda type things, and really more about real world applications. The AI tools are getting faster. They're getting to be more productive. And I think people are using it more than helping them draft an email. In the M&A space, we've got a lot of PE firms that are taking spreadsheets and dropping them into AI tools to then do comparisons and contrasts between other acquisition targets they have to see whether or not there's good accretive value in their projections. So the tools that are coming with it in Accenture and those KPMG and others know it.
Anthony Carrano:That's fantastic. And aside from that, have you seen any other significant shifts you know, in the landscape? Some things have just kinda changed in the last, you know, you know, the political realities aside, but just in the business, you know, other, you know, aspects in the business climate, have you seen some changes?
Tim Mueller:Yeah. Like they say, all politics is local. So and that does hit everybody irrespective of voting and and who's in office. There are always some types of, you know, follow on effect of political decisions. But in the Microsoft space in particular, you know, the compounded annual growth of intelligent cloud revenue is really what's starting to take shape.
Tim Mueller:So that is the, you know, the idea of, again, there's the recurring revenue that comes with those intelligent cloud revenue companies versus your productivity and business application companies that are much, you know, growing much slower. That's more like an 8% growth versus 14% to even 20% for the cloud type of focus. And really what we're seeing is a lot of these IT services, Microsoft channel partners that on their website certainly are promoting the cloud push, which is the first step, but it's a pivot that's gonna take a little bit of time. You know, we get a really good bird's eye view into the financials of these partners. For us, that benchmark is 70% to 75% recurring revenue.
Tim Mueller:And that tells us that they have achieved that pivot into being more of a cloud applications provider, as opposed to kind of eat what you kill, project based, more of the type of Microsoft channel partner of the days gone by. And I think most people are looking to make that pivot. And the other one is, as we see the movement of, you know, Great Plains over to Business Central, those Great Plains customers and partners, they've got not only dozens, but hundreds that, you know, see a sunset coming up for support. And they know that even though they've gotta move over to now monthly recurring revenue and not those $17k to $20k upfront hits that they're able to take of revenue. They do know long term that's the way to go and Microsoft is making them do it.
Anthony Carrano:Mhmm. It's interesting that you bring brought that up because I'm not sure if you're you're probably not aware, but like, you know, we have different clients that are, you know, Dynamics partners and we're even, you know, not only working with them on the migrate, you know, like marketing to their GP customers, but also even to like their SL and NAV customers who still haven't made kind of that transition over to Business Central. So that's interesting.
Tim Mueller:Well, you know, on that one point though, Anthony, it's funny because buyers at first blush say, boy, Great Plains, we don't wanna touch them. But the savvy ones say, not only can we do the migration over to Business Central, but then can we hook them in and start cross pollinating other services and products? And those are the ones that I think are gonna find a much greater jump in valuation of the asset they bought versus them saying, boy, they're just so way behind and what can we do with them?
Anthony Carrano:Well, talking about that, so how have you seen, like, how is the focus on things like AI and cloud services impacted? Have you seen those M&A valuations for Microsoft partners?
Tim Mueller:Still to be determined on the AI, only because it's so nascent and there isn't enough runway behind. Most buyers wanna see historicals, you know, trailing twelve months, what have we done 24 to be able to mitigate the trust, in what they're buying. They wanna make sure that they don't have as much risk. And there just clearly isn't enough AI revenue to be able to show. Now, for those that say, listen, we've got five or six proprietary projects in play and how we customize AI in particular with Copilot, those are really starting to get the attention and now they're gonna buy forward looking revenue for which they will give those companies some credit, no doubt, but those that have already gone, there are multipliers difference in those that have made the pivot to the cloud.
Tim Mueller:So some of the smaller mid market and full mid market firms that may have seen somewhere between, you know, 6.25 and 7.75 times their adjusted EBITDA for a traditional Microsoft partner that doesn't have any customer concentration issues. They're gonna lock in 9 to 11 to 12 times their adjusted EBITDA if they have now made pivot to more cloud and Azure revenue that has, you know, annual recurring revenue associated with it.
Anthony Carrano:That's fantastic. And maybe I want to kind of go back to something you had mentioned, you know, at beginning here of the show where we talked about, you know, with AI, you know, gaining momentum, you know, the the urgency to modernize the enterprise. And you there there was a phrase you said how they're they're looking at with fortifying with personnel. Could you maybe unpack that a little bit?
Tim Mueller:Yeah, I think if you look back historically, every buyer will say, you know, the culture's got to fit and we've got to make sure we have the right people that we're bringing in starting at the top down, right? If the founder or owner of the business doesn't gel with the buyer, the founder should find someone else, but the buyer will typically. But once they check that box and they understand that there was some forward thinking, the personalities that then beget their culture kind of line up. Then they start looking at certifications and they start really digging in in their due diligence, you know, the longevity of their employees, what their expertise might be, how many are making pivots to having the newer certification as a cloud provider. And then that starts getting what we're seeing is even more value from the buyer.
Tim Mueller:Logos are great, no doubt about it. You don't wanna have customer concentration issues, meaning if you've got more than 15% of your revenue coming from one client, then you start getting a little bit itchy on if that client leaves, what does that mean to us? And we've got some clients with 25, 30 percent. We've got one client that has 100% revenue from one client, one Wow. And, you know, it was just an offshoot of another business that encouraged them to keep building it.
Tim Mueller:But they were looking at it and they weren't saying, listen, don't give me more revenue because that's gonna mess up my customer concentration. They're like, bring it on, we'll take it over. But that may not always be a bad thing. If it's backed up by two, three year contracts that are bulletproof and you've got multiple decision makers bringing you business from that client, it does help mitigate the risk for the buyer, but still they go in and they typically do a little bit of a discount if you've got some wet customer concentration issues, but the contracts help. And the fact that their annual recurring revenue that comes over and over again helps them look away a little bit on customer concentration.
Tim Mueller:Yeah.
Anthony Carrano:Well, what triggered kind of the question for me was, you know, when you're talking about how the focus on AI, impacting valuations, but then if they're you're seeing companies that are gaining some traction, they're building up capabilities and skill set, but, you know, they haven't fully quite figured out how to, like or fully, you know, monetize it to the extent. Like, how how much weight is given to to one versus the other? Or because is it it can't simply I mean, my I mean, you're the expert, but I'm thinking it can't simply just be a percentage about the about the numbers.
Tim Mueller:No. I think it's it's really about the adoption rate, Anthony, that we're seeing. So our rule of thumb is if you can get customers between 35%,40% adoption to AI tools, and before that was migrating to the cloud, and before that was D365, and before that, you know, so you've got all these iterations of Microsoft as they've come to market. And when you get 45%, you know, in that range that have adopted, then I think you can look in the mirror and say, this is now a primary offering for us. And it's a slog.
Tim Mueller:It really is because there's education that goes along with it. And there's trust that if we're gonna put this money into it, is it secure? Is it gonna be reliable for us? And will it make a difference to our bottom line? So those are all things that we see as kind of the building blocks for adoption.
Tim Mueller:I think if there's a combination of the best foundation of resources is almost equal to how you sell it. The marketing message, how convincing you are. I think those play equal weight in when they go to their end line customers and say, we've got some things that we think we're gonna make you more efficient and have higher bottom line profitability.
Anthony Carrano:Well, that's great, Tim. And on that note, let's talk a little bit about so how do niche specialization such as cybersecurity or advanced data analytics influence M&A and attractiveness for Microsoft partners?
Tim Mueller:Cybersecurity might be the two more seductive words in our space because it's white hot. The bad guys are getting worse and getting more aggressive in their attacks. And so even the companies that never thought about having cybersecurity as a service to pay for each month versus just having some, you know, cybersecurity software installed on their machines is creating much greater opportunities. So if you have some managed services that you are, providing to your customers, it's really a fate of complete that you're gonna have to have MSSP capabilities as well. And so we see that translating very aggressively into the M and A space because again, along with that ARR, annual recurring revenue that managed service providers can bring to the market, that MSSP, the managed service security, brings the same kind of annual recurring revenue.
Tim Mueller:But the fact is you can charge more for that service partially because the talent is a lot harder to attract with the expertise of cyber versus you might have with your main mainline IT services remote worker. So that side of it is that I think it's not a nice to have for the Microsoft partners that are, you know, offering managed services. It's a need to have or a must have to be able to to not only have it in house. Sometimes it's great to partner with somebody, as a third party to bring in the cybersecurity, but you're messing around with your margins and ultimately, you're not necessarily overseeing the quality of that service. So we're seeing more and more activity where, you know, even the $10,000,000 Microsoft partner is bringing in some cybersecurity expertise.
Anthony Carrano:Now I know, you know, you've you've talked a lot about just the importance of, obviously, you know, the stickiness with the customer, but at the same time, they're not having, you know or she's also, you know, focusing on, you know, not being too weighted on your customer concentration, you know. Certain customers occupying, you know, a certain amount, you know, above the portfolio. What about let's talk about, like, with partner relationships. Like, so how do, you know, partner relationships influence the success of M&A transactions, you know, among Microsoft partners or does it?
Tim Mueller:You know, during what we call quality of earnings, QOV, the buyers will always want to dig in to see what the relationship is. So for instance, we've got someone going into the deep part of due diligence right now where the buyer will want to talk with the top 10 customers that you have. But they also want at least two contacts at Microsoft to see what that partner relationship is and whether or not, you know, our client is responsive to leads, how they're ranked among other providers in the region, how well thought are they within the Microsoft ecosystem. So the relationship that our clients, the sellers have with Microsoft, or let's say they might be also offering, you know, Salesforce or ServiceNow, you know, bite your tongue, any of those, but many do have multiple offerings. Wanna be assured that when they bring them on in house, oftentimes the buyers don't have a Microsoft presence at all.
Tim Mueller:So they've decided better to build to buy than build because building, you know, it's messy. You leave a lot of skin on the sidewalk, a lot of trial and error, whereas you bring in a strong Microsoft partner who's got a great relationship in Redmond, and they have the contacts even on a regional basis to prove it, that helps valuation. And at the very least, it substantiates for the buyer that it's a solid business from customers to employees all the way to the relationship with Microsoft.
Anthony Carrano:That's fantastic. What about in terms of just with, so I know you touched on obviously the relationship with Microsoft. What about with with their their current, like their own partner channel, like their own P2P situation? And, know, that can affect, you know, their some of their larger offerings. Does that get factored in?
Tim Mueller:Yeah. No doubt. The next step is really what is P2P health? You know, can you do a health check before you go to market? Just to verify that if it does get, you know, during the quality of earnings check, are due diligence. If someone asks, you know, set of partners, what are their thoughts? And oftentimes it's disguised as a customer survey. So a customer satisfaction and partner satisfaction survey. And we've been hired by X to learn more about your relationship with them. Well, do they follow-up? If in fact you have choice to partner with others, will you choose that one company over another?
Tim Mueller:So they wanna really understand how these Microsoft partners do business throughout the entire food chain, if you will, of offerings or relationships. That even goes to the hosting. How do you well do you work with hosting? How well do you follow their direction on redundancy and backups?
Tim Mueller:Because there definitely are technology audits that take place in our M&A process where they want to jump in and see exactly if there is any kind of proprietary source code that you're using for your SaaS offering or for any kind of proprietary platform you have. They wanna check to make sure that it's not brittle and that it's really strong. Or what are your day to day technology philosophy or thesis? And can that prove out in those QOV and due diligence requests?
Anthony Carrano:Now you mentioned about, you know, during your quality of earnings, you know, process, how do you assess the financial health of a Microsoft partner before recommending it for acquisition?
Tim Mueller:So first and foremost, customer churn. Do they have customers going back three, five, seven, ten years even that have stayed with them and continue to, you know, give them more business. So we wanna make sure that there's stability. Due diligence covers employee stickiness. Do you have the right people in place and have they stayed there?
Tim Mueller:Not beyond their welcome, whereas some employees were there now, there's Ed in the corner, he's been there for twenty five years and gotta make sure that Ed has a lot of institutional memory and that he's bringing value every day versus he just didn't have the heart to make a change for that position. So first and foremost, customer stickiness, no customer concentration issues, employee stickiness. And then, you know, what is that culture that we're talking about? You know, if in fact the buyer wants to come in and have a return to work policy, how detrimental will that be? I think most companies now that have done the whole work from home issue are starting to rethink and say, I know it's gonna cost a little bit more to have brick and mortar again, but what kind of credibility and even productivity do we have by having people come in three days a week?
Tim Mueller:And is the psychology of people working in solitude every day, all day there? Or is the productivity decreasing because there are lot more temptations to throw a load of laundry in, to start a crock pot for dinner, whatever it's gonna be, get up from school, great quality of life. But I think a lot of employers are saying, wait, I think we could be better at least by having a hybrid three days in, two days back at home. And some are going full Monty to say, listen, come in five days or you don't have a job. You know, we've got in Cleveland where we are from home of the Rock and Roll Hall of Fame.
Anthony Carrano:And the Cavaliers who were expecting great things this NBA playoffs season.
Tim Mueller:We hope they've won a championship by the time this airs. But we're also the world headquarters for Sherwin Williams Paint. And they've made acquisitions of Glidden and others, and they just built a brand new headquarter building, 40 some stories in Downtown Cleveland. And they're saying, want everybody to work five days a week. We believe in our heart of hearts that we are a better company and that you are more fulfilled as employees if you come down.
Tim Mueller:And so we're gonna make it easy. We're right on the public transit line. If you wanna take the train in, if you wanna take the bus in, we've got more than enough parking and they're just basically putting their foot down. And I do think that a lot of tech companies, including Google and Apple and others are saying, you know what? We think we're a better company by coming into work.
Tim Mueller:So during due diligence, a lot of companies are saying, boy, if we institute that return to work policy, are we buying a company that we're gonna have mass attrition and people leaving? Do we wanna look at a company that has people that are on the road and they love being there because we're gonna probably ramp them up and be on the road more? So that's all part of the very delicate process of due diligence. It's quite frankly, for our sellers is incredibly fatiguing and it's just a grind, but we prepare them for it. And at the end, they're just exhaling and glad that it's done.
Anthony Carrano:I bet. I bet. Well, that's why you guys are a leader in this space. Right? And so what about just, I mean, can you share maybe a personal case where your assessment and the extensive due diligence of a partner's financial health led to a successful acquisition?
Anthony Carrano:I mean, I know we've got many, many, many over decades, but maybe you can pick one. And I'll say it maybe like around a specifically, maybe a smaller partner if they're doing, let's say under $10,000,000 in revenue.
Tim Mueller:Yeah, Anthony, that's a really great question because those smaller partners typically don't have the financial mechanisms in place to fully satisfy the buyer's due diligence. So consider this, you've got an owner operator that also does some of the accounting, might have a controller, definitely has an external accountant, but now they're being surrounded by financial analysts, accountants, lawyers, due diligence experts, with these requests for data. So you've got four to five people on a deal, maybe more, that are all starving to analyze this data. Whereas the owner operator is looking there with deer in the headlights going, first and foremost, I'm not even sure I could do that report and give it to you. And secondly, I've got one person and we then counsel them to say that time is never on the side of the seller because world events, customers getting acquired, customers saying they're going a different direction.
Tim Mueller:All these things can happen during due diligence that might make their revenue a little bit lumpy. So the big part of it is how do these under $10,000,000 companies keep up with the data requests or the quality of data that they're looking for. Buyers on the other hand, they know that if they take a company that is more of a lifestyle business, there could be a great value by turning just a couple of knobs in billing, recording, accounting, and marketing muscle to help build that business up. So they know that there are things they could do to make it make improvements. But the seller can get very overwhelmed by the kind of due diligence requests there might be.
Tim Mueller:The one thing bar none that if they go through our process and maybe something happens where they need to go on pause for six or eight months, maybe they lost a big customer, maybe there's a, you know, event within their life, illness or whatever that says, Hey, I just can't do this right now. To a person, everyone comes out and says, I had no idea about how to best run my business. And so I went through due diligence and realized all the different metrics I could have been looking at to improve my business that now that I've gone through it, I'm a better business person and a better owner. And if they go back to market typically a year later, whatever it might be, they are they have a much better business, but they're much better prepared for our M&A process.
Anthony Carrano:So that that actually because I was thinking when you when you started sharing, you know, I was thinking about, like, maybe can you provide an example? And you don't have to, you know, share the business's name, but where they came in thinking they've got, you know, their their gold. Right? But going through your process that they realized that they had a lot of things that they needed or some things that needed to work on. And then eventually, you know, when they came back, whether it's six months, twelve months, you know, two years back that they fixed that and then, you know, it was a very successful acquisition.
Anthony Carrano:So somebody, you know, who's coming in, I don't want to say, like, arrogant or prideful, but just very, very confident that we've got a winner here. But they realize that, no, you've you've got some stuff you need to need to work on. Can you share maybe a case around that?
Tim Mueller:Yeah. And we're never gonna say your baby's ugly. So that ends conversations really fast. But but every one of these guys have some warts on them just because, you know, they're trying to grow the business and, you know, trying to deliver and they're trying to have employees that love where they work. It is no small feat to grow a $5,$7, $10,000,000 Microsoft practice.
Tim Mueller:The first million is probably the hardest, and then it gets really hard to go from seven to 10. But we had one customer in particular, one client that came in and they had the first time through, we had a great cadence with different buyers. We attracted almost 70 different buyers for that Microsoft partner. And by the way, Microsoft partners remain white hot. So it's not a crazy thought to track fifty, sixty, seventy buyers to an assignment or engagement that we go out.
Tim Mueller:So we had about 70. The real goal was to try to bring it down to a manageable number of fifteen, eighteen buyers, and then try to get five to seven really good offers. In the midst of this, they lost their biggest customer. And this was after they drew a lot of customer interest. And that customer made up almost 20% of their business.
Tim Mueller:Immediately, we had some buyers that dropped off. Sorry, know, if it starts here, where does it end? Or that was a customer that we really valued highly, and I'm sorry, we just can't go through with it. Some others stayed in the process and said, Hey, let's get through it. The revenue that you're gonna lose with this, the value that we were gonna place on you, we're not gonna give it a discount, but we're going to push it out further in your earn out so that you could realize still the replacement of that customer's revenue.
Tim Mueller:So we're just gonna change the structure, maybe have a little bit less cash at close. And maybe on the back end, your team combined with our marketing is able to replace that revenue, you'll get full credit for it. But then as we moved into it, they were very highly dependent on VMware for a lot of their hosting and what they were reselling to their customers. And so VMware then gets acquired and they start basically pushing away all their small business customers with And all of a sudden the contracts that were given to the final customer had to all be reworked and many of them are going, wait a minute, that's not the three year contract that we just signed. And you've guaranteed that the pricing was going to freeze, not knowing the VMware was going to be sold.
Tim Mueller:So not only do they have to try to get more revenue out of that VMware component of their contract, or look for another provider that could do something as similar and as locked tight as VMware. So we took them off the market. We just said, listen, with the 20% customer you lost and now with VMware, let's take it off the market, relock and load, try to get not only a better solution for the pricing that VMware had given you, but let's also replace that 20% of revenue. And on top of that, grow another 10 or 12%. And so our client looked at us straight through the camera and goes, we're probably two years away from getting to where we need to be.
Tim Mueller:Oh and that's about exactly where they were. And mind you, the client was in their late sixties. So we're seeing this silver tsunami that's happening where, you know, the baby boomers said, it's not that they don't want to stay, but their accountants and their estate planners are saying, listen, you have to sell. You don't have a management team below you that could buy you out. You don't have kids to take over the business.
Tim Mueller:And if something happens to you, your estate will likely get a lot less if you don't get a succession plan and sell. So he's working with the clock now to that is both on the age, but also all those other variables we covered, but he did a great job, found a different solution for the VMware, not only got business development, having replaced it, but they also grew on top of that. And then we took them to market and they finally sold. It's a messy process oftentimes, but we look at them all the time and say, we have many millions of reasons why you need to be heads down and just grind through it because that is oftentimes the most net worth that these guys have, women and men as the ownership of that business. And when they sell, you know, it's not foreign for us to get a text message on a Friday night at sunset of the side rail of a deck with the ocean behind it and a margarita sitting there with just the words thanks from a client of ours that has fully now gotten through their earnout and they're free and they're sitting there seaside enjoying their retirement.
Anthony Carrano:As we wrap up part one of this insightful interview with Tim, we've traversed the complexities of Microsoft partner m and a deals, explore the transformative power of AI and cloud adoption, and uncovered the pivotal role of relationships and niche specializations in driving valuations and success. Tim's expertise has illuminated the ever shifting dynamics of this space, offering a clear eyed view of both challenges and opportunities. But the conversation doesn't end here. In part two, we'll delve even deeper into the future of these trends, examining what lies ahead for Microsoft partners and how businesses can navigate the evolving landscape. Trust us, you won't wanna miss what's coming next.
Anthony Carrano:Thank you for joining us today and stay tuned for part two. Until then, keep innovating, keep adapting, and as always, stay curious. And remember, whether you're looking for new customers, new markets, or new solutions, IAMCP can help you achieve your goals. To learn more, the IAMCP website at www.iamcp.org. See you soon.
