It seemed like the culmination of the American dream when California-based Taylor Guitars announced it was embracing 100% employee ownership. But the big winners may eventually be Canadians.
Hippie musicians Kurt Listug and Bob Taylor were young coworkers at a small guitar shop called the American Dream when the owner quit to go backpacking (it was 1974, after all). The pair bought the store for $3,700, including machinery and parts, and renamed it. Nearly 50 years later, Taylor Guitars has 1,200 employees and factories in El Cajon, California, and Tecate, Mexico.
Listug and Taylor aren’t quite ready for retirement, but they’re serious about ensuring that their departure won’t hurt the company’s fortunes, its products or its employees. Taylor Guitars is too big for individual employees to buy, which usually means Wall Street or private equity would end up pulling the strings. (Rival guitar maker Gibson endured several ownership teams and fell into bankruptcy protection; it’s now owned by KKR, the world’s top leveraged-buyout firm.)
Instead, early this year the former hippies formed an employee ownership trust (EOT) that helps transfer company shares to all employees, based on seniority and tenure, funded by an innovative form of long-term debt. But the deal came together only because a small group of Canadians think employee ownership is the best form of capitalism.
Our Winter 2021 issue included a story on Toronto-based Social Capital Partners (SCP), an entrepreneurial not-for-profit that has spent two decades looking for social-development tools that work. Recently, SCP decided that the best way to fight income inequality is to give workers a share of the equity they build for their employers. “Employee-owned firms grow faster, default less often, are far more resilient in economic downturns, and pay their people more – even before you factor in the wealth-generating effects of ownership,” says SCP managing director Jon Shell.
The Taylor deal was partly funded by Listug and Taylor, and also by a duo that wants to make lots more music together: SCP and HOOPP, the Healthcare of Ontario Pension Plan. Essentially, Taylor Guitars borrowed the money to give shares to all its employees – and will pay back its lenders through future profits. As Bob Taylor announced, employee ownership “allows us to ensure our independence for the long-term future, and continue to realize our vision.”
“Taylor is a terrific first deal for us,” says SCP’s Shell. “The owners are wonderful people, the company is a top performer, the structure of the deal is great for the new employee-owners, and Taylor Guitars are a well-known, sexy brand.”
Employee ownership is more than a passion for SCP – it’s a road to wealth redistribution. “We think an economy owned by oligopolists, monopolists and financial firms motivated with the wrong incentives is an existential threat to society,” says Shell. “We spend every day thinking about what we can do to get in the way of that.”
Unfortunately, the SCP-HOOPP solution doesn’t work in Canada, where EOT regulations are different. So SCP is actively lobbying to change Canada’s Income Tax Act to support EOTs that can borrow to invest primarily in employer shares, and hold those shares for the long-term without tax penalties to the employees. “We have had some great conversations across the political spectrum,” says Shell. “Everyone likes it. It’s everything ‘building back better’ is supposed to be.”