Unlocking M&A Success: Human Insights and Tech Transformation for Microsoft Partners
Welcome back to part two of this insightful conversation with Tim Mueller, M&A managing partner and cofounder of IT ExchangeNet, a leading M&A marketplace exclusively for mid market IT businesses, where we're diving deep into the world of Microsoft partners, mergers and acquisitions, and the future of AI and business. If you joined us for part one, you know that Tim brings years of expertise and a unique perspective to the table. Today, we're picking up right where we left off, exploring the human side of the M&A process, the evolving role of AI, and how Microsoft partners can position themselves for long term success. So whether you're a business owner planning your next strategic move or simply curious about the intricacies of the M&A process in the tech industry, you're in for a real treat. But before we get started, here's a question for you.
Anthony Carrano:What do successful business leaders, rock solid partnerships, and the Grateful Dead have in common? Well, according to Tim, they all play a role in understanding the soul of the deal. In this episode, we'll uncover why relationships matter just as much as revenue, how cost effectiveness can be a game changer, and the single biggest factor that could reshape the tech industry as we know it. Spoiler alert, it's all about AI, and Tim's got the insights to prove it. Let's dive in.
Anthony Carrano:Well, the thing I really, as as you were just sharing now and just even as I was reflecting on our, you know, our previous episode that we did together, the thing that always just strikes me is I mean, here, you're dealing with, you know, very technical, very smart, you know, people, you know, that have have grinded it out. You've gotta have a lot of confidence in building, you know, your business as you're going, you know, forging the fire. But at the same time, then, you know, it's equally, you know, when you're going through this process of not only just radical transparency, but, you know, humility, right, that you have to have, like, you know, in that to, you know, recognize, you know, things for what they are and be willing to to kinda make those changes. And so that's just something as I as I just think about the human element of the process that, you know, these these sellers are going through. Have you found, like, in the the decades that you've been doing this, have you found that you've had to, like, advise them or counsel them, if you will, on kind of that that qualitative that human part of it of, hey, it's you know, there's you know, it it's gonna it might hurt for a little bit. Let me coach you through, you know, you know, just the humility and being teachable, etcetera. I mean, could could you share a little bit about, you know, from your experience?
Tim Mueller:You know, having gotten to know you now, Anthony, I'm not surprised by your question because that is what you're known for in the channel is the human element of it and how that plays out.
Anthony Carrano:Yeah.
Tim Mueller:I'm not surprised that you wanna dig in on that one, and that's that's, I think, why you are so respected in in this channel. Our role is part priest, part rabbi, part therapist, part big brother, part adviser. And depending on what hat you're wearing is kind of related to what stage of the M&A process there is. So, clearly, the upfront stage where you kind of get ready to get in position to be in position for a sale is clear adviser work where you're dotting the i's crossing the t's, making sure that everything during future audits are gonna be in place.
Tim Mueller:So we kinda let work with them to get their best suit and tie metaphorically on before we go to market. But if you jump fast forward into, let's say, 80% through the process, now the amount of therapy work you're doing and part rabbi, part priest, part devote, increases precipitously because because there's there is that humility factor where people are looking at you going, we like your business. You did a nice job. It's a lifestyle business, but why didn't you do this? And why didn't you take care of these metrics?
Tim Mueller:And why didn't and you have to look at it. And and one of the things we tell them is that you are not gonna be perfect for the seller for the buyer, I mean, but that's what they want. They want something they can tinker with, maybe make some wholesale changes in some areas because that makes you valuable to them. If they take a perfect business and just integrate it into them themselves, there's nothing that could make that acquisition more valuable. And so just know that some of it's posturing, you know, we didn't do this right, so we're gonna give you a discount on our our offer.
Tim Mueller:Or, it's not how we would do it, but the good buyers understand the the ego, not the bad ego, but the ego that everybody has. They're proud of what they built. I mean, these guys and and and, you know, lady and ladies and and men that built these Microsoft businesses, they've put their kids through college, they bought new homes, sometimes a second home. They have done probably more than they ever thought they would do professionally because of how they ran their business.
Anthony Carrano:Mhmm.
Tim Mueller:So hats off to them for doing it. They just happen to be smaller than the buyer that's going to envelop them in their practice. So, of course, they're not gonna have as polished of the systems and and billing and all that reporting ability.
Anthony Carrano:Mhmm. Mhmm.
Tim Mueller:So I I think the better buyers understand it and they treat them more humanely so that the humility that comes out of it is a lot easier. But we have had deals. We had probably one of the biggest deals in our history fail at the eleventh hour because the CEO of the buyer got into the personal side of questioning the CEO of the seller. And the CEO of our client, the seller said, I could never work for him and I know my people could never work for him. So I'm out.
Anthony Carrano:Oh, wow.
Tim Mueller:And he was so fatigued with the process because it just takes a lot out of you. He said Uh-huh. I wanna pause, and he never went back to market. He just kept the business private.
Anthony Carrano:Wow.
Tim Mueller:So sometimes that happens in the eleventh hour. And so we ask offline part of our role is to give the buyers a little bit of the cycle profile of our seller to say, here are some hot buttons that we know after working with them the last couple of months that we'd like you to be gentle and and understand that, you know, hey, the the the seller, you know, lost his wife in the last twenty four months. Real issue. Right? And there are different sensitivities or triggers they have.
Tim Mueller:So please be soft on them because during that epoch of time, during that illness and for months after, he was in a cloud. He was in a haze. And so know that that dip was related directly to a major loss. So skip over it. Know that it's more about the future and how he rebounded versus getting too tight on the area that kinda was was a little bit of a down downfall.
Anthony Carrano:Mhmm. Mhmm. No. That's that's that's fascinating. That's awesome. Now I know you've shared so much already about, you know, factors, you know, you know, I'm gonna kinda bring it back to, you know, on the business and and the and the number side of it. In fact, you've already shared I mean, you shared several between, you know, the the just the percentage of customer concentration, the amount of reoccurring revenue, customer churn, employee retention, you know, proprietary, like, you know, IP, you know, EBITDA. You know?
Anthony Carrano:So you've shared a lot of of the factors, you know, driving, you know, high multiples in these M&A deals. Would you say are there any other key factors maybe that you haven't touched on that we should that our listeners should be aware of?
Tim Mueller:Yep. Microsoft partners really need to have gross margins of at least 50% or higher to really paint the picture of someone that's pricing, you know, get the right pricing schedule for their customers.
Anthony Carrano:Mhmm.
Tim Mueller:And that's something that is is higher, you know, by standards of many others in the space. You know, Amazon has got about 17% gross margins in their work.
Tim Mueller:The closest that we see to Microsoft are the Oracle partners that are between forty five and fifty, and then Google partners that sit around 40% gross margins. But, you know, in in that food system, you've got Microsoft that really is the highest and should be the highest of 50% of gross margins or higher. If you look at the kind of the two year forward growth rates, Microsoft partners should be at least 12 to 15% to be considered, you know, average to be, you know, for the buyers that look at it. So if you're growing less than 10%, two year forward looking, And I know it's really hard to say the second year is a real tough squint because one year out is mostly what most of the partners can see with confidence.
Anthony Carrano:Mhmm.
Tim Mueller:But if you go into the second year, it'll be roughly wrong. Don't know exactly how roughly wrong it'll be, too low, too high. But that kind of 12% annual growth rate is really what a lot of the buyers are looking for.
Anthony Carrano:And is that, do they care so much about what type of revenue? And, mean, I think I know the answer, but I don't wanna see, like, whether it's at, you know, project based revenue, subscription revenue, you know, or is it, you know, net new rep like, net new logo revenue, a land and expand revenue? Do they do they care about what type of revenue that is, or they just want to see, you know, just that 12 to 15% growth?
Tim Mueller:Yeah. Great question. And and I think it is probably the right question because not all revenue is made equal. And during that quality of earnings, they're really looking at the quality of revenue that's coming in. So so clearly, the customers that are sticky, that have one, two, three year contracts that are gonna move forward mitigates all the risk for the buyers.
Tim Mueller:So those contracts or those projects that have a set sunset, that's really difficult for the buyers to get around and say, how do we continue to replace the projects? And a lot of Microsoft's partners over the last twenty years look at us and go, that's what we've done. That's how we've done our business over the years. But the buyers are saying, yeah. But we wanna see you pivot to the more sure business. We know you're gonna take a hit on that one time license revenue that you normally would get.
Anthony Carrano:Mhmm.
Tim Mueller:But now it's gonna be recurring, and to you, that's more valuable revenue for us. Second to that would be new logo acquisition. So what kind of, you know, new business did you see in '23 versus '24? And what are you projecting in '25?
Tim Mueller:A lot of Microsoft partners can can base that potential new revenue on discovery sessions that they do. So they could directly correlate discovery sessions for pay with prospective customers to new revenue that's gonna come in. So don't have a lot of discovery sessions going on in February, March, June, then you're likely gonna see a little bit of pipeline, issues that go along with that. So number two would be, net new, logos.
Tim Mueller:Number three, you may not have contracts or new net, logos, but customers that have been consistent over three, five, ten years that you know have continually come to you with new projects. So while that's not as valuable as the customers that are under contract, it still has value and something you can point to.
Anthony Carrano:Mhmm.
Tim Mueller:And then the last one is just sporadic projects that don't have any kind of consistency, and you've got a whole load of different logos, but they come in and out just like the wind. And there are sunsets. There's a three month project. Here's an eight month project. Here's twelve months, but we don't think there's any follow on work on it. So those are the four types of categories that we see in order of importance.
Anthony Carrano:Mhmm. So kind of a piggyback, how has the with the focus with AI and cloud services, has that changed any of those numbers, and those expectations?
Tim Mueller:Not enough information yet on the AI side. Wish wish we could do it. Next seven months from now when we reconvene for a check-in, I promise you I will have more data on that, but we just don't have access to the data because it's not there yet. Uh-huh. What was the other side of the
Anthony Carrano:Just about with the with the cloud services because has that evolved caused some of those numbers to evolve a little bit over time just from your perspective?
Tim Mueller:It has, and it's reflective in the multipliers. So there are two ways to to value a business. One would be a multiplier of your revenue, and the second would be a multiplier of your adjusted EBITDA. And for more information on add backs for the adjustments, we could do some have some notes that are attached to this part of the podcast, Anthony.
Anthony Carrano:Mhmm.
Tim Mueller:Generally accepted add backs that get you to your adjusted EBITDA. Most everybody watching this podcast will be valued on in a, in a multiple of your adjusted EBITDA. And so knowing that, those companies that are more cloud based get a bump in their multiplier. So instead of kinda topping out at seven and a half, they may start at seven and a half times your adjusted EBITDA and go up to eight, nine, nine and a half, 10 when they have a practice more than 45% of their revenue that's cloud based, and they've got more in Outlook in their pipeline to bring on more logos that are looking for cloud.
Anthony Carrano:That's what I thought. You know, I appreciate you sharing that, and I'm sure you've there are plenty of resources on the IT ExchangeNet website that folks can go to and and dig into some of that. So let's kinda maybe shift a little more about kinda some future stuff. So what do you I'm a put you on the spot here a little bit is how do you foresee the future of M&A activity evolving for Microsoft partners in, you know, like, the next five to ten years?
Anthony Carrano:Let's bust out your crystal ball for us.
Tim Mueller:Yeah. Well, I mean, the the easy go to is to say, if you haven't sniffed around or figure out how to best lever AI, you're already behind. But everybody's heard that at every conference they go to. Everything, every, every little hook for a conference that says, you know, building AI into your value proposition and such. But I think it's real. And and there are two components of that.
Tim Mueller:One would be through certainly Copilot and any other ancillary AI tools that you could become an expert on that you could then offer to your customers. But equally, if not more importantly, how you run your business. So how will you lever and be more cost effective to you know, you may not have to bring as many employees on to have your Microsoft practice if you're levering a lot of those tools that can automate you know, if you're doing some cyber, there certainly are more AI tools that are gonna automate pen testing and certain observability, for your security practice.
Tim Mueller:There's ways to run your your billing and also be able to see metrics that, you know, we I'll hearken back to fifteen minutes ago where these all of these different clients of ours are saying, god, I wish I knew what to do with all these metrics or how to find them in my business. I will guarantee you five years from now standard fare using AI tools to help them run their business better, to help them bill more quickly, to help them collect and be pings. You know? We're just scratching the surface on what Microsoft partners can do to be more effective to run their business. And, you know, if they thought offshoring was a way to get higher margins for their business, to have a workforce of now 40% of your work face force will be AI agents that are doing those types of of manual pieces that that normally you're you've been paying people to do.
Tim Mueller:And it's scary to think about our workforce that are gonna be replaced, but it's the standard evolution of technology
Anthony Carrano:Mhmm.
Tim Mueller:You know, going from the industrial revolution all the way through today. But you gotta figure out how to best make yourself more valuable by being an expert with the AI tools.
Anthony Carrano:Mhmm. Mhmm. When you say crystal ball, I don't think there's any there's a singular transformational, and I would even dare to say, catalytic push for how to force to push your business, AI, since the formation of the Internet. I think everything in between when the Internet was first introduced circa 9596 with Mosaic has all been certainly building upon that great moment Of graphic user interface with the Internet until now AI. And I think that will be something that may make the Internet revolution pale by comparison. And and I I'm bought in fully.
Tim Mueller:There isn't a workout that I do or a walk that I take unless I'm with my wife. That doesn't have my earbuds in listening to This Week in AI or AI Copilot podcast. Everything's surrounded because unless we fully understand it, we can't be that advisor in the front end of this. We also talk to a lot of Microsoft partners that are two, three years out from wanting to sell, and they're asking us how do we architect the business that will get the greatest value. So unless I'm aware in my team, particularly of where AI is going to affect positively Microsoft partners, we can't help them put their best suit and tie on twenty four, thirty six months from now.
Anthony Carrano:Mhmm. Well, hearing what what you said just kinda two thoughts came to mind, especially the one of the the second part about how you run your business and being cost effective. And it's interesting. I'm going through this series of just, you know, of of founders and where, you know, just a consistent theme. And this is covering, you know, founders of, you know, of businesses and American entrepreneurs from even going back to until, like, the 1800's up to the modern, the modern day.
Anthony Carrano:And they're one of the consistent themes is, you know, cost effectiveness because, you know, as the markets, you know, change, you know, prices will go up, prices will go down, revenue can get adjusted. But once you, codify certain, you know, cuts and efficiencies, you know, that stays fixed when things are going up or things are going down. When they're going up, you just get, you know, greater margins. So I I appreciate you sharing that. The other thing is as I was listening and there was a point, I forgot what question it was, but when we were talking about, like, the relationships and about the partners, one of the things that you found in, you know, that you've observed in decades of experience, one of the key relationships that, you know, buyers are looking for and sellers is, you know, they're how, you know, ingratiated are they with Microsoft and how well known in Microsoft?
Anthony Carrano:So I think of, like, just a practical advice hack for people listening is saying, make sure you're aligned with Microsoft. You know? Because, you know, they've got, like, resources and insights to, you know, what the next, you know, five to ten years and, you know, just make sure you're aligned and continue to ingratiate there as it makes sense for your business to you you know, while you're then running your business, you know, aligning with Microsoft, and that kind of will help position you, you know, for that, you know, for that, you know, exit in five to ten years. I don't know. Is that what do you think?
Anthony Carrano:Is that is that a good like a good hack, bad a bad idea, good idea?
Tim Mueller:Yeah. It's a great pro tip for these guys for sure. And I do think it's a fine line. One, yes, you do wanna have a stellar relationship so that when you do decide to sell and they ask for that contact at Microsoft, they would say full throated, I know Anthony really well. We work with them on a weekly basis. We give them referrals. They respond. And more so than responding, if they get the assignment, they get rave reviews. So that's the ideal reference you want from Microsoft. But there's a fine line between organic revenue that you generate and referral revenue that you take from Microsoft.
Tim Mueller:So we had a client years ago that bragged and said, we've got such a great relationship with Microsoft that 70% of our revenue comes from Microsoft. And while that takes a lot of work to Yeah. Nurture and curate that relationship, If for whatever reason Microsoft decides to pull back on referrals or they decide to kinda do an attaboy on on giving business to another partner in your region that they were normally giving to you, those are variables that you are not controlling any longer.
Anthony Carrano:Mhmm.
Tim Mueller:And so I don't know if there is a perfect balance. It certainly isn't 70/30.
Anthony Carrano:Yeah. Yeah.
Tim Mueller:And on the other side, is it the other way, 30/70 where you're only getting 30% of the referrals because there isn't a partner alive that says, oh, no. I don't want any more referred business from you because it's gonna mess up my percentage.
Anthony Carrano:Uh-huh.
Tim Mueller:But I would just say much like you wanna work really hard to have your customer concentration at 10% or lower, you also wanna work at always originating, organic revenue from your sales team and never get too reliant on Microsoft to give you all of your revenue. It's just smart business. And that way, don't have to ever have to think about declining the revenue because, you know, the other part too is if you decline enough of the referrals from Microsoft, they're gonna just know you as the person that declined much like dating.
Anthony Carrano:Mhmm.
Tim Mueller:Two or three times to say I don't wanna go out. You're not gonna ask anymore.
Anthony Carrano:Uh-huh.
Tim Mueller:So so you wanna be in position where you can take on all those referrals, but not be placed in a position of, of weakness where you're fully dependent on that to make your numbers.
Anthony Carrano:No. And I'm I won't go into the stories, but I because, obviously, we work with a lot of Microsoft partners on the marketing, you know, side. And, yeah, we've had some clients go through those ebbs and flows, and it's it's just been interesting kinda walking that journey with some of them. I'll just I'll just leave it at that.
Tim Mueller:Fast forward that same kind of, yes, we'll take the revenue. We appreciate it. We appreciate it. And now we're in the tail end of due diligence for an m and a deal, and Microsoft notifies them is that you no longer can get the, you know, the billings on these this software license that we're gonna we're gonna go direct to the customer. And now all of a sudden, tens of thousands of dollars of revenue that you normally were the pass through to your client is now gonna be held on by the regional sales rep from Microsoft because they don't want you to take the margin. And that's done toward the tail end of due diligence. It's meant to take the deal.
Anthony Carrano:Yeah. I bet. I bet. Well, this has been fantastic. I I can talk to you all day.
Anthony Carrano:Tim, this there's just the amount of insight and wisdom that you share is just is just fantastic. So really appreciate it. As we wrap up, I know I wanted to ask you. So it's actually gonna be kind of like there's gonna be two part. It's because I you mentioned that you do listen to a lot of podcasts. So, basically, what's one book you would recommend a business owner read as part of their preparation to sell their their business, and what's one podcast you would recommend that an owner listens to as part of their preparation to sell their business?
Tim Mueller:Well, hold on. I will that's really funny you asked that question, but I've got 20 of them here in my because I give away to all of my my customers.
Anthony Carrano:The soul of the deal. Okay.
Tim Mueller:The soul of the deal. I've got 20 of these written by Mark Morgenstern. The best book ever written on M&A. He's a huge Dead fan, and he makes analogies all the time about the Dead in this book. Okay.
Tim Mueller:Great recommendations on the back of the cover. Mark Morgenstern, The Soul of the Deal. No better book out there to prepare yourself the psychology side of it of selling your business.
Anthony Carrano:Excellent.
Tim Mueller:And then secondly, David Gilbert, who was at Microsoft running their garage for a number of years, entrepreneur, he has a podcast called Acquired that he's been running for about, I wanna say, fifteen years now.
Anthony Carrano:Oh, wow.
Tim Mueller:He's an esteemed graduate of The Ohio State University, but went off as a 22 year old and and end up running the garage at Microsoft and then got into other types of businesses at Microsoft that he was an executive in before he went off. And he's doing venture now. He's probably not more than 35 or so. But these acquired podcasts, Anthony, are ninety minutes, two hours, and they go deep into businesses and how they're run. And for geeks like us, and I include you in that geek
Anthony Carrano:Absolutely.
Tim Mueller:You can get lost in these these podcasts. And they also do you know, they were one last ones, I think, to interview Charlie Munger before he died of virtual activity.
Anthony Carrano:Okay.
Tim Mueller:And Charlie never did interviews, and he was just so intrigued by these two young guys that he sat and talked with them for two hours. But, yeah, the podcast called Acquired.
Anthony Carrano:Okay. Definitely. And I'll put a link to both of those. The soul the soul of the deal and Acquired in in the show notes for sure. Appreciate it.
Anthony Carrano:And I'm I'm gonna go ahead and after we're done, I'm gonna subscribe to Acquired and start listening to it. It's I love listening to that kind of stuff. Well, last question then is, so how can partners who wanna, you know, either sell their business or acquire one, you know, get started?
Tim Mueller:So, you know, the pat answer is call us and we and no matter where in the stages but we we do have something called Ready, Set, Go, and it's a free readiness assessment for those who are contemplating the sale of their business. And we'll give you a scorecard to say, you know, you're looking great in this side of it. You might wanna focus a little bit more in this other area. So it's called Ready, Set, Go.
Tim Mueller:We work very closely with the IAMCP. In fact, we're the, M&A marketplace for the IAMCP, and we know the Microsoft space like the back of our hands. It's likely the the most number of deals we do on an annual basis are Microsoft partners. So the ready, set, go, free, piece is great. If you are a buyer, we have something called buyers direct where you can, for free, advertise all the criteria of companies you're looking for.
Tim Mueller:And on a monthly basis, we push that out to all of our potential sellers and to see if that pinky matches the pinky and the thumb matches the thumb so that we could match buyer and seller. Those are a couple of ways. We're always talking with buyers to understand what their their investment criteria may be so that we then put it in our database. We've got rudimentary AI that helps us match buyer and seller. So the more we know from the buyers, the better we could be and more accurately to bring our sellers to them.
Anthony Carrano:Excellent. Excellent. Well, we'll definitely have links to both of those in the show notes and then on social media as well. Tim, this has been fantastic. Thank you again.
Anthony Carrano:Really appreciate you coming on with us.
Tim Mueller:Anthony and and Rudy, love to always see you guys. Good to communicate between these shows too. It's always good to stay in touch and to, you know, understand from you the finger or the pulse that you have on the Microsoft network, but also just sitting for an hour and chatting. Always love doing it. Anytime you wanna, do a refresh, we're here. But thanks again for the opportunity to sit with you.
Anthony Carrano:Sounds good. Thanks. Have a great rest of the day.
Tim Mueller:You too.
Anthony Carrano:As we wrap up this enriching discussion with Tim Mueller, one thing becomes abundantly clear. Success in business is not just about numbers, multipliers, or market position. It's about relationships, foresight, and adaptability. Tim has shared invaluable insights on the human element of mergers and acquisitions, the pivotal role of AI in shaping the future, and practical tips for Microsoft partners navigating the ever evolving tech landscape. I really enjoyed just the time that I had with Tim over these last two episodes, and here are five key takeaways I took from our time together.
Anthony Carrano:First, number one, the human element. Building and nurturing relationships whether with Microsoft, buyers, or clients is just as critical as financial success. Mutual respect and trust can make or break deals. Number two: Cost Effectiveness Codifying cost efficiencies in your business ensures lasting margins regardless of market fluctuations. The third takeaway is AI's transformational power.
Anthony Carrano:Leveraging AI tools isn't just about offering cutting edge solutions to clients, it's about using them internally to run a lean, effective business model. From automating manual processes to refining metrics, AI is set to revolutionize operations. Number four, your partnership with Microsoft. Aligning with Microsoft effectively while ensuring a balance between organic and referral revenue can position your business for long term success and a higher valuation. And number five, preparation is key.
Anthony Carrano:Tools like the Ready, Set, Go Readiness Assessment and Buyers Direct Initiatives are practical resources to streamline the M&A process for sellers and buyers alike. Remember, as Tim eloquently stated, AI may just be the catalyst push that marks a new era of transformation, one that rivals the internet revolution itself. Staying ahead means not only understanding the tools, but also positioning your business to thrive in this dynamic ecosystem. So whether you're a seller preparing, you know, for your next big move or a buyer seeking your ideal match, Tim's advice serves as a road map for success in today's fast changing tech world. If this conversation resonated with you, don't forget to check out the resources Tim mentioned, especially there was the book called The Soul of the Deal by Mark Morgenstern and the acquired podcast for deeper dives in the world of business and acquisitions.
Anthony Carrano:And, of course, you know, explore the Ready, Set, Go, Readiness Assessment and Buyers Direct to take that first step in your journey. Until the next time, stay curious and keep innovating. And keep in mind, please check out, you know, www.iamcp.org. Members are finding a lot of great opportunities to, you know, connect with other members to build out, you know, their partnerships, increase revenue and customer satisfaction, but also find a lot of great resources to navigate the relationship with Microsoft. You can find out more at www.iamcp.org.
