The New Valuation Playbook for Microsoft Partners in the AI Era
If you own a Microsoft partner business, here's a question worth asking. If a buyer looked at your company today, would they see a true AI powered business or a traditional services company with an AI store? And here's another. As AI changes how services are delivered, are the metrics you've spent years optimizing still the metrics that will determine what your company is worth? Because the M&A market for Microsoft partners is changing quickly.
Anthony Carrano:Buyers aren't just looking at EBITDA, reoccurring revenue, and utilization anymore. They're digging deeper into revenue per employee, gross margin scalability, repeatable IP, AI driven customer expansion, and how much of your growth engine you actually control. Today, we're gonna find out what that means for the value of your business. 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.
Anthony Carrano:And in each episode, we talk with some of the most innovative partners and industry leaders about the strategies, relationships, and market shifts shaping the Microsoft channel. And today, we're talking about something that could directly affect the enterprise value of your business. My guest is Tim Mueller, managing partner and cofounder of IT Exchange Net, a global M&A consultancy specializing in advising sellers of MSPs, MSSPs, VARs, and other technology businesses. IT Exchange Net has completed more than 300 transactions and built a global network of more than 90,000 potential buyers. Tim has joined us several times before to discuss what drives Microsoft partner valuations, but this time the conversation is different.
Anthony Carrano:AI agents and Microsoft's evolving cloud strategy are changing what buyers expect to see inside a partner business. Having an AI story isn't enough anymore. Buyers want evidence that AI is making the business more scalable, repeatable, profitable, and defensible. So we're gonna dig into what's happening in the Microsoft partner m and a market right now, what buyers are actually looking for, and the new metrics that could determine which partners command a premium and which ones get discounted. Tim, welcome back to Profiles in Partnership.
Tim Mueller:Anthony, it's good to see you and Rudy again. Always enjoy our conversations, mostly because I know it's coming from the perspective of the Microsoft partner as opposed to some generic technology podcast that we sit in that they might mention Microsoft. So I I really look forward to these discussions.
Anthony Carrano:Excellent. And we're gonna have a very rich discussion indeed. I know we're looking forward to digging into a lot of, you know, key areas. But before we dive in, for those who aren't familiar, you know, don't know you, don't know your company, give us a little bit of a, you know, overview of who you are and a, you know, background about the company.
Tim Mueller:Great. Thanks, Anthony. IT Exchange Network, we've been around for twenty five years, over 300 transactions, really deeply rooted in the Microsoft channel. And I do think that Axial had ranked us the number one middle market technology firm for M&A last year and top five this year. Really proud of that ranking.
Tim Mueller:But one of the things that we really pride ourselves on is the buyer base. We've got over 90,000 buyers globally that range from private equity firms to strategic buyers. So typically, when we bring in a Microsoft partner, we'd already know who those buyers are for those firms.
Anthony Carrano:Excellent. And I know you also guys do a lot of work, you know, with the IAMCP. So for those listening, if you go to imcp.org, you see m and a in that nav bar, that'll take you right to our, you know, IT Exchange Net landing page that we've got set up, and you can, you know, learn more, get a lot of great resources. So, alright. Well, let's, let's jump in.
Anthony Carrano:Well, you know, so, Tim, I know the last time we talked, you said a Microsoft partner that couldn't articulate how AI would affect his business could become hard, a hard no for for buyers. And, you know, it's... You know, we're in eight or nine months, you know, into this. Has that actually happened?
Tim Mueller:You know, it's actually gone faster and harsher than we expected. You know, we took... Made some bold predictions about what 'twenty seven and 2028 might be, but things have just rapidly increased in 'twenty six. Eight months ago, buyers were penalized buyers were penalizing the partners who had no AI narrative. Today, they're penalizing the partners who only have a narrative. Right?
Tim Mueller:So these are considered kind of AI tourists, if you would. You know, just reselling standard licenses and renaming their standard cloud migration as AI readiness. But those are getting filtered out really fast by sophisticated buyers even before the LOI is drafted. So right now, are looking at...
Tim Mueller:Look at yesterday. Microsoft had released yesterday that Azure crossed the $100,000,000,000 mark in annual run rate. $100,000,000,000, how fast that grew. And they're growing 40 to 45% per annum, and that's going to accelerate to potentially 50% as what the analysts were saying yesterday. So this, you know, if a partner's organic growth is single digit while the Azure consumption is sprinting toward 45%, buyers immediately conclude that that partner is really losing relevance. Right?
Tim Mueller:So if they can't even keep up with the growth of the demand for Azure, that means they're falling behind.
Anthony Carrano:Wow. What evidence are buyers asking for now?
Tim Mueller:So they have moved past the whole idea of license seat counts. Right? That was what they were looking for before. You know, Microsoft now has over 30,000,000 paid three sixty five copilot seats, but buyers don't really care about the resale margin. You know, that's on a, like, a margin on a $30 seat.
Tim Mueller:They're demanding proof in three different areas. One is Azure consumption pull through. So what does it look like for every dollar of Copilot or AI advisory sold? How many dollars of high margin Azure infrastructure or even data platform consumption comes out of it? Number two is proprietary agents.
Tim Mueller:So how do those custom agents get deployed for every dollar that's spent? And then the third one is really the internal margin expansion. You know, there's going to be a window here, where everyone's going to really explode on their margins because they're getting helped by AI. But that window is going to close. And so the big question is when a partner is using AI to deliver professional services, that will be done with fewer billable hours, which will then have higher gross margins.
Tim Mueller:And the question is, how can partners keep owning that type of margin when everybody else plays catch up? So that's what's gonna be the million dollar question in 2027.
Anthony Carrano:Or if they're looking to sell, it'd be a multimillion dollar question.
Tim Mueller:No doubt about that.
Anthony Carrano:Wow. That you've you've really kinda laid the groundwork for a lot of the things that we're gonna get into in this episode. Before we kinda dive into some of those questions, I do wanna ask you. I know at the end of, you know, '20, 2025, you were extremely bullish about, you know, the next eighteen to twenty four months. Now that we're kind of well into 2026, were you right?
Tim Mueller:Yeah. We wrote a white paper at the very beginning of the year on how good it was going to be. We're in the midst of having a record year because of buyer appetite. And it seems almost, you know, counterintuitive by all the geopolitical risk that's going on right now, you know, things with Iran, seemingly every day we're, you know, picking a fight with Canada or someone else and that typically does affect our market. But because there's over a trillion dollars of dry powder still out there in private equity, and equally importantly is that the shareholders of the strategics are demanding more than double digit growth.
Tim Mueller:And so when you get to a certain size, to do 10% to 15% growth per annum is difficult. And really, the only way to satiate that growth is by M&A. But the difference today is that both, while both the strategic buyers and the PEs are deploying their money quickly, you know, think about the private equity, their full time job is to deploy money. They are being hyperselective, more than we've ever seen it before. So it isn't like a rising tide is affecting all multiples, you know.
Tim Mueller:Instead, valuation is being dispersed to those who are the higher quality of the businesses, leveraging AI to increase margin, be efficient, but also having a long term game plan. You know, Microsoft has a backlog that surged over 85% year on year. I think it's somewhere in that like $680,000,000,000 backlog. So acquirers know that this tidal wave of enterprise commitment will translate into implementation and managed services. The private equity want their slice of that, for sure.
Anthony Carrano:For those who maybe aren't tracking, when you say backlog, what do you mean?
Tim Mueller:Well, this is demand for Microsoft services. So if you look at that, that's almost a almost a $700,000,000,000 backlog that is still to come for implementation that are enterprise commitments. And so that's all managed services dollars, that's implementation dollars. And so when I say that private equity and strategics are being selective, they want to make sure that the partners that they acquire have not only the resources to do it, but the ability to do kind of a rinse, lather, repeat solution based on AI that isn't reinvented every single time. And those are tool sets, They are things that could be deployed into their customers, and it's something we'll talk a little bit more later in in this discussion.
Anthony Carrano:Well, I think I know how you're gonna answer this next question, but I'm more, you know, especially really curious here kind of your insights and the re... The the the reasons why. So, like, on a scale of one to 10, how strong is the Microsoft partner M&A market today compared with kinda what you expected?
Tim Mueller:You know, that's a great question. So overall, I would give it an 8 out of 10. I would give it an 8.5 for specialized high capacity partners. And a four for your traditional commodity MSPs that are purely resale shops. So the aggregate might be around 8 because dry powder remains high at record levels.
Tim Mueller:The strategic consolidators again are backed by committed debt and corporate buyers need that technical capacity that oftentimes will take years to grow organically. So it's always that buy versus build question. And so we think that the buyers will on buying versus trying to build it. We've got a client right now with Latin American resources that have real high margins, you know, compared to let's say offshore resources, there's no language barrier whatsoever. And we had 120 buyers for this company, which set a record for us because not only was it high margin, but they were very proficient and they have almost unlimited growth potential so they can scale.
Tim Mueller:And that's where, you know, it is a specialized high capacity partner.
Anthony Carrano:That's excellent. That's excellent. Thank you. Rudy?
Rudy Rodriguez:Well, that's pretty amazing statistics there. So really appreciate that. You know, one of the things that we've been doing is trying to educate partners, you know, because Microsoft's doing this. They're telling partners to move from AI experimentation to be frontier transformation partners. From an M&A perspective, what separates a partner that has genuinely built an AI business from one that is just simply adding AI to their marketing?
Tim Mueller:You know, Rudy, you know, there's a genuine AI business change that is really affecting the operating model for our partners. So think of it as marketing fluff that just installs plug ins, right? Versus a Microsoft restructured its financial reporting into like two components, placing agents and infra at the center. And then when it's signaled that that infrastructure works without agents, that becomes a utility. And we all know what utilities are, right?
Tim Mueller:We always take utilities for granted. The water turns on the faucet, you take it for granted. But if it's not there, it's like, wait a minute, I don't have any water or the heater doesn't work in the middle of winter. That's a utility that we take for granted. And I think buyers look at that same way too, that if they don't have the agents, they're just a utility.
Tim Mueller:And without that, the infrastructure can never scale. So, think about this, if 90% of your revenue is still time and materials through migrations, you're really a legacy services firm and your valuations will be low, right? Lower on the food chain. But if you deploy reusable frameworks, right? Data pipelines and fabric or continuous agent management on retainer, now to your question, now you have an AI business that not only will be able to be relevant for the next several years, but be incredibly seductive to the buyers. So bottom line is you don't want 90% of your revenue still with time and materials on migrations.
Rudy Rodriguez:That's a huge shift. So following up on that, what does a buyer need to see in diligence to believe a partner's AI story?
Tim Mueller:Yeah, so I look at that in three different buckets. One is kind of your scope of work archive. So are your statements of work really defining business workflow? And when that workflow, is there automation that can be repeatable, right? Do you have custom agent integration?
Tim Mueller:Number two would be the consumption logs. So direct correlation between the partners' deployed solutions and a sustained growth in this ever growing Azure environment. And then number three is really repeatable IP, right? So can the code repository and architecture blueprints, can it be used across multiple clients? Because when a buyer looks at that, Rudy, they're saying, Boy, if you've been able to pick it up and have it repeatable among many clients, likely our clients are going to have the same thing.
Tim Mueller:And so now you're creating something that is beyond IP but kind of a marketable offering. So that repeatable piece that is AI backed, whether it was primarily influenced by Copilot or if we have some of our partners that are working exclusively with Cloud Code, right? But then creating it and pushing it into a Microsoft environment. And buyers, it matters not to them how you get there, but if you've got repeatable IP, that becomes a difference maker.
Rudy Rodriguez:All right, well, let's, you know, over the last few years, we've talked with, you know, about what makes a Microsoft partner valuable, okay? And things like recurring revenue, EBITDA, customer concentration, management debt, and specializations. With Microsoft now moving, telling partners they need to move into frontier transformation, agents, AI first business models, what will buyers measure over the next three years that they weren't measuring three years ago?
Tim Mueller:So a few minutes ago, I mentioned that these guys are really selective today. So everything you just mentioned as far as customer concentration, strong EBITDA, recurring revenue, all need to still be in place. But the core metric historically has been kind of billable headcount and utilization, right? They'd go in there and see how many people are on your bench. And of those that are being utilized, at what rate are you doing it?
Tim Mueller:So billable headcount. Over the next three years, we see all that changing. They're going to be looking more at revenue per employee and gross margin scalability, right? So when they're doing their due diligence, they don't want to just see that they were highly utilized. They want to know how much revenue is being generated by each employee and then to the point of our Latin American partner we have for sale, they have amazing gross margin scalability.
Tim Mueller:So if a partner scales revenue by 50 and needs 50% more engineers, the multiple drops. If they can expand by 50% and need 20% more engineers because of the tool sets that they've created, now you've got something. And then the buyers will also track the net revenue retention, right? And that could be that's completely driven by AI workload expansion. So in the cloud era, keeping a customer paying, let's say, $10k a month was solid.
Tim Mueller:But in the Agentic ecosystem era, an existing customer should naturally expand consumption as agents start handling more of that workload. So that's what's going to be the big challenge. And quite frankly, you know, the young kids coming out of college today with engineering degrees, software developers, they're coming in with a huge advantage because they're natives versus the rest of the industry, they're kind of interlopers on this AI movement And so if they can come in and they understand how to create agents that then foster agents below that, and then it can create higher gross margins and net revenue retention, those are the ones that are going to get snapped up out of college.
Rudy Rodriguez:Gotcha. Well, following up on that, what questions will these buyers be asking that almost nobody is measuring today?
Tim Mueller:You know, I kind of look at that as three questions. Number one is what percentage of your managed service gross margin is generated by agents versus the human tier one or the tier two ticketing that has been kind of the stalwart. So what percentage of your managed services gross margin is by autonomous agents? Number two is what is your data to AI revenue ratio, right? So proving the firm can prepare enterprise data architecture before even employing, deploying the AI.
Tim Mueller:And that can be, you know, like Fabric and Dataverse. Those are things that can really help the data to AI ratio. And then number three is how many proprietary agent workflows are running in production inside your client's core platform, right? Whether it's an ERP or a CRM. So if you can show that there are proprietary agents that are running in the workflows there, that again to my earlier point is portable.
Tim Mueller:You could pick that up and drop it into other clients. And so before the M&A space, we had buyers that say, Listen, we've got a lot of pressure to grow our revenue. And that has not gone away, but the added pressure now is how can we find a partner that's been forward looking enough that have built these proprietary agent workflows that can be dropped into each of their customers. And that's where the big win is. So if the theme hasn't gotten close so far in this discussion, I think the underlying theme is how scalable and repeatable is what you're building right now.
Rudy Rodriguez:So where are buyers and sellers furthest apart on valuation today? Is this the disagreement about the multiple or how much of the seller's projected AI growth should actually be believed?
Tim Mueller:So where the tension is, and tension is good. I mean, if you ever listen to Tony Robbins, he talks about the six things that most human beings need. One is certainty and the other one is uncertainty, right? Because if you knew everything that was going to happen, it would be boring, right? So everybody needs a little bit of uncertainty.
Tim Mueller:So the sellers right now see the Microsoft commercial backlog doubling and then price their business on what they plan to capture in 2027. The buyers, however, want to pay upfront multiples for trailing 12 cash flow, right, in contracted ARR. So there's a difference in this. Buyers only want to buy the company that they're acquiring at that moment, which means I'm going to look back twelve months. So we call it trailing twelve month and pay you on a multiple of that.
Tim Mueller:The Microsoft partners are saying, gosh, we just knew that there's hundreds of billions of backlog. We want to get paid on that. So there... That creates kind of an expectation gap. So a founder might want like a 10 to 12 x multiple based on future AI run rates, and the buyer is looking for eight to nine x on historicals.
Tim Mueller:So inherently, they're kind of like, they're just born to be crushing. And if you were a law school student, you could probably take either argument and win on that. So the only way around that we can see is that if there are aggressive earn outs that go, let's say instead of eighteen months, I can see sellers accepting a two and three year earn out more now than ever because they feel like the long term upside on transaction value is in their favor. Now remember, we talked maybe three episodes ago about what transaction value means, what's the definition? Oftentimes people say, wow, you got 10,000,000 cash at close and you have a possibility of getting, you know, another 3 to 5,000,000 in earn out.
Tim Mueller:Well, the only transaction value definition that's true is in the rearview mirror. When all the earn outs are completed and you look back and say, yeah, we got the entire $5,000,000 earn out. So that transaction value was 15. But at the day of closing, you have to be at least realistic to say that transaction value at this moment is only 10. So my point is based on that difference of opinion, if in fact Microsoft partners truly believe that biggest upside is ahead and they truly want to be part of something bigger than their own, then they'll be willing to take longer earn outs.
Rudy Rodriguez:Very good. Anthony, you want to follow-up?
Anthony Carrano:So, yeah, Tim, one of the things... You know, I really appreciate you talking about, you know, about the scalable and repeatability as, you know, we've talked a lot about, you know, in prior conversations about reoccurring revenue being kinda like the two sexiest words, you know, m m... In m and a. And, yeah, I know you mentioned, like, reoccurring revenue is still enough, but can you talk about maybe distinguish a little bit more, you know, between what's considered high quality versus low quality reoccurring revenue and around that scalability?
Tim Mueller:You know, Anthony, yeah, that is... It still holds as the most... As the sexiest and most seductive words, recurring revenue. Not many years ago, simply having 70% of recurring revenue automatically earned you a premium, right?
Tim Mueller:They looked at it and said, Wow, 75%. They have now pivoted from being a traditional IT services Microsoft partner that is kind of eat what you kill, whatever we can do. And to their credit, a lot of the founders were like, I'm not going to turn away business that has a eight month sunset on the project or a one year sunset. But then they got trained by some of their friends exiting or if they're reading trade rags to say that you no longer can do it, you have to have recurring revenue that is maybe multi year. And then that then gave them a premium guaranteed.
Tim Mueller:Today's buyers kind of are ruthlessly dissecting that ARR, annual recurring revenue, quality. So a high quality might be, you know, multi year managed services with a custom agent attached to it. Where before month to month CSP seat licensing was considered recurring revenue and that's no longer flying. Gross margins before, if you get 14% on pass through margin for software sales, terrific. Now buyers are looking for 55% to 70% on proprietary services.
Tim Mueller:And by the way, they're getting it. So it's not like, wow, we're accepting 14% before and now we've got to jump to 55%. The fact is, if you've got a strong enough AI strategy, that should be a layup shot for at least the time being. How do you defend that ARR? Before, it was like easily transferred from one CSP partner to another, but now it's got to be embedded in the business and critical to the daily operations.
Tim Mueller:So that's where all ARR is not created equally. And the beauty on this one for the buyers that they're getting smarter, but they too are using a lot of these AI tools to jump in and do a quick analysis. For the first time ever, our non disclosure agreement now has new language that says buyers are prohibited from putting one bit of information into a large language model, so CoPilot, Gemini, Perplexity, Claude, unless it's a closed environment. So they have to prove that it isn't some off the shelf ChatGBT app that they have that they're dropping all of our clients financials in, in order to be permitted to be able to use AI tools. Now the advantage the buyers then get is that instead of dropping it off to a couple analysts and say you're gonna work all night and come back with a thesis on whether or not we need...
Tim Mueller:We could buy this, you're looking at five minutes of work in Claude and it comes up with a bulletproof defensible strategy on whether or not this seller is worth buying or if they are, what is the discount we're going to give them because they may not have checked the gross margin box exactly the way we want or they may not have checked the recurring revenue box. So that's where things change so quickly in our space and that's literally since eight months ago, Anthony and Rudy since we last spoke, that has become one of the primary, I guess, silver bullets for buyers.
Anthony Carrano:Fascinating. Fascinating. What about... You know, obviously, you know, we're here talking to, you know, Microsoft, you know, partners, and a lot of partners, you know, work really hard to try and create, you know, co sell, you know, alignment and motions, you know, with with Microsoft as a way of growing their business. But for those then that, you know, successfully do that and come to a place and when they're looking to sell their business, how does a buyer then determine whether our partner, right, who's...
Anthony Carrano:Let's say they're actively involved in co sell, you know, with Microsoft, owns the customer relationship or, you know, Microsoft does? And kind of as a as a follow-up, you know, piggyback on that, you know, at what point does dependence on Microsoft for, like, referrals, incentives, licensing margins, or CSP revenue become a valuation risk?
Tim Mueller:Yeah. We we had one seller at one point that was really proud of their relationship with Microsoft saying, Hey, listen, I've been in this gig for twenty five years. And as a result, Microsoft trusts us And 70% of all of our deal flow, right, our pipeline is from referrals and waiting for some confetti, right? Like this is amazing. And the good news is they've got a great relationship with Microsoft.
Tim Mueller:The bad news is buyers come in and look at it and go, you haven't done it organically. What happens if that relationship or even plural relationships go south? What if there's a rift at Microsoft and some of your regional partner, liaisons are taken out and no longer are you the one that they go to. So our stress test is if your co sell programs were cut by 50% tomorrow, what does that mean to your profitability? And so that's so that we want to understand if dependence becomes a critical valuation risk.
Tim Mueller:You know, buyers always want to do that, that kick the tire to say, here are all the worst case scenarios. So our feeling is if more than 40% of new customer pipeline originates solely from Microsoft without proprietary inbound marketing, that's a negative mark. If EBITDA depends significantly on the back end Microsoft incentives, because Microsoft, if you look at it, I remember being at Inspire about seven or eight years ago and Microsoft was announcing the multibillion dollar investment in incentives for their partners. So as owner operators, partners are going, that's fantastic. As a buyer, if EBITDA, like their profitability depends on those incentives rather than direct client billing, black mark.
Tim Mueller:If a partner sells standard CSP licensing with less than 20% of proprietary managed services, black mark, right? Because those should be entrees, if not lost leaders, into the more profitable kind of proprietary managed services. So that's our thought on incentives and relationships with Microsoft as far as referral programs.
Anthony Carrano:Mhmm. No. And that's that's excellent insight. And I I would hope a lot of partners who are listening, you know, to this really take note of that that while it's good to, you know, lean in, get those co sell, you know, motions and opportunities going, you still have to maintain what I would just say, you know, your own area of domain of control, things that you can heavily directly influence if you wanna position yourself to sell. So these are really good numbers. Thanks, Tim.
Tim Mueller:You know, Anthony, I remember a question that Rudy asked a couple of sessions ago. I was looking at my notes from our previous sessions, and that was about customer concentration. And so that is where, like, the two headed monster of a founder is. At one side, they're saying, oh, wait a minute, my customer concentration percentage is gonna be messed with. I can't take that revenue from you.
Tim Mueller:No owners ever said. Versus saying, all right, I'm looking at my customer concentration. As a... As an owner, I'm at risk. If I'm at 30% with all of my revenue coming from one customer, so I've really gotta work double time to dilute the percentage of customers there.
Tim Mueller:But that gets even more scrutinized, right, when you go into the sell process. So when we sit with Microsoft partners all the time that say, you know what, I'm 60 now, I want to be out by 65, we help them give them a roadmap. So we'll do a quick stress test to say, through the lens of a buyer, what areas do you need to work on over the next thirty six months so that when we take you to market, your story is bulletproof and completely attractive to the buyers. And that's one of them.
Anthony Carrano:Excellent. Excellent.
Anthony Carrano:That brings us to the end of part one of our conversation with Tim. And the big takeaway is clear. An AI story isn't enough anymore. Buyers want evidence. They want to see scalability, stronger margins, repeatable IP, high quality reoccurring revenue, expanding customer value, and a business that isn't overly dependent on its founder, a single customer, or even Microsoft for growth.
Anthony Carrano:But that raises the next question. If AI technology itself is becoming commoditized, what actually creates a defensible moat and a greater enterprise value for a Microsoft partner? That's where we'll pick up in part two. We'll explore the IP and Agentic workflows buyers value, why security is becoming foundational to AI, the growing importance of Microsoft marketplace, and the five things Tim says partners should do now if they want the option to sell within the next eighteen to twenty four months. So I wanna thank all of you for joining us on this episode today of IAMCP Profiles in Partnership powered by Dunamis Marketing.
Anthony Carrano:We hope you enjoyed this podcast. We know we certainly did, and we hope you found 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.
Anthony Carrano:So whether you're looking for new customers, new markets, or new solutions, IAMCP can help you achieve your goals. To learn more, visit the website at www.iamcp.org.
