In a bid to retain its independence, product quality and culture after its founders eventually transition out of the business, Taylor Guitars has changed a fundamental aspect of the company. As of Dec. 31, the El Cajon business became 100% employee owned.
CEO Kurt Listug and President Bob Taylor are retaining their jobs. The corporation, which had $122 million in revenue in 2019, is now owned by a new Employee Stock Ownership Plan, or ESOP. “The ESOP is the shareholder,” Listug said.
Knowing how to run a guitar company takes experience, said Taylor. That was developed in-house. In its 46 years of existence, the business grew from making a single guitar a week to having the capacity to build 700 per day. It now distributes in 60 countries.
“We’re getting older. So there’s going to be an imminent sale of the business, either the day we die or sometime before that,” Taylor said. “This is a way that we can maintain what we think is special or even magical management of our company … . And what better way than to transition into employee ownership? Because they’re the ones that understand what Taylor Guitars is.”
Taylor and Listug said the move has been well-received in the market. One large retailer, whose management was apprehensive about what might happen to Taylor products under new ownership, was very happy to receive news of the transition.
“[T]he track record of guitar companies getting sold, to other guitar companies or private equity, isn’t very good,” said Listug.
Sharing the success of the company is “really the point of the ESOP,” Listug also said. The people working hard to build the company “are the people that are going to see the financial benefits from the company as shareholders … and then their shares will go up in value. …
“It’s the best thing we can do to help tackle wealth inequality for our employees,” he said.
“People are super energized” with employee ownership, Taylor said, “and what we’re seeing already is there is all this renewed individual responsibility.”
The ownership news offered employees a boost in the middle of the coronavirus pandemic, said Barbara Wight, CFO at Taylor Guitars.
Shares will go to employees at Taylor’s El Cajon factory; at its maquiladora plant in Tecate, Baja California, Mexico; and at its European distribution center.
“As far as we can tell we are the first company in Mexico that has actually brought an ESOP to a Mexican company,” said Wight.
Along with the new benefit, Taylor plans to offer its employees on either side of the international border education on what their new benefit means, and some help with financial planning, she said.
There is no way team members in Mexico could have dreamt of having multiples of their salaries in their retirement accounts, said Ted Margarit, managing director, corporate finance with Chartwell Financial Advisory Inc. The Minneapolis-based company advised Taylor on all aspects of the ESOP transaction and creation of the optimal ESOP capital structure.
‘The NAFTA of ESOPs’
Greg Fresh, managing director and head of corporate finance at Chartwell, called the Taylor plan “the NAFTA of ESOPS,” since it involves a U.S. company running a factory in Mexico, using Canadian capital. The Healthcare of Ontario Pension Plan provided capital for the ESOP.
One of the less considered aspects of ESOPs is that they are trusts, no different than 401(k) accounts, Fresh said. The trust has no money of its own and therefore has to use debt. The vast majority of debt for the Taylor ESOP came from Listug and Taylor, with the pension fund providing a minority.
Other companies that are partially or entirely employee owned include Publix Super Markets, the Gensler architectural firm and Davey Tree Expert. Defense contractor Science Applications International Corp., in its previous iteration, was employee owned before going onto the public market.
Taylor has been working on its transition to employee ownership for seven years, Listug said. It is a longer period than most, said Fresh, who compared Listug and Taylor to good carpenters: they measured twice before cutting once.
ESOPs can be complicated. However, Listug said, “the more we learned about it, the more we realized that it was really right up our alley.” The ownership structure met the objectives for Taylor Guitars’ founders, shareholders, employees, customers and vendors, he said.
The partners dismissed other options. Keeping the business in the owners’ families was not a good option because the next generation was “not into guitars,” Listug said.
The partners decided against finding a strategic buyer — another musical instrument company — because they felt a new owner would not design and build the guitars as well.
And they dismissed having a private equity buyer come in, work to grow the company and attempt to sell it at a profit. “We thought that was pretty distasteful for the shift in motivation to go just to making as much money as you can,” Listug said, “as opposed to the company’s success coming from the quality of the instrument and the quality of the company.”
A Full Order Book
Taylor had $122 million in revenue in 2019. Prior to COVID-19, it anticipated revenue of $130 million in 2020.
The company’s order book is full to the point of bursting. “I know we have over 125,000 guitars on order, which is pretty mindboggling,” Listug said. Due to COVID-19, however, the company is taking extensive measures to divide its factory into zones and keep employees away from one another — and it’s building fewer guitars.
Guitars, ukuleles, banjos and musical instruments played at home “have done quite well” in the COVID-19 environment, Taylor said. “What hasn’t done well is the pro audio side, which might be half the size of our industry. Who needs to buy a P.A. system, an amplifier, a speaker tower, cable?”
The trend could easily reverse itself, the executive added.
“Guitars are booming, band instruments are not,” Listug said.
Finishing Other Initiatives
Taylor Guitars took seven years to transition to employee ownership because it wanted to get some other projects out of the way, Listug said. These were the establishment of a distribution operation in Europe, establishment of an ebony mill in Africa, and a new factory in Tecate.
“We needed to complete them all and have them fully functioning and working well,” Listug said. The partners also wanted to pay off the debt for the three initiatives. Each had a price tag in the millions of dollars.
“We completed that by the end of last year,” Listug said.
The third partner in the business at the time of the transition to an ESOP was Andy Powers, who Bob Taylor called “the best guitar builder in the world.”
“We brought him on to really take over from where I left off — in other words, designing our guitars, and providing leadership for company,” Taylor said. He said that he feels a person who knows how the build guitars should be at the highest point in the company.
“You hear Elon Musk talking about it all the time: he’s saying the heads of companies should have engineers, not just financial people [in charge]. We feel the same way, but just take out ‘engineers’ and put in ‘guitar builders.’”