Leo Fender Sold His Guitar Company to CBS for $13 Million in 1965. In 1985, a Group of Employees Bought It Back

In 1965, a former radio repairman who never learned to play the guitar sold his guitar company to the Columbia Broadcasting System for $13 million. According to Reverb, that was two million more than CBS paid for the New York Yankees the year before. Twenty years later, CBS sold Fender to a group led by its own managers for $12.5 million, less than the network had paid.

What happened in those two decades matters to anyone who owns a business. A buyer pays for what it can measure. Most of what made Fender valuable could not be measured.

Why Leo Fender Cashed Out

Health forced the sale. In 1964, Leo Fender, then 55, became ill and offered to sell the company to Don Randall, his partner in Fender’s sales arm, for $1.5 million, according to a company history published by Gale. Randall did not take that deal. The final price came in at nearly nine times that figure, and the buyer was a broadcaster growing beyond television. Leo stayed on as a research and development consultant from 1965 until 1970.

What CBS Valued, and What It Cut

CBS ran Fender like a production line. Reverb describes the CBS-era changes as a shift to a more mass-production style of guitar making. By 1968, polyurethane had replaced nitrocellulose as the main finish. In 1971, a three-bolt neck plate replaced the four-bolt design and bridges moved to cheaper, heavier parts. Reverb says those changes were implemented to reduce production costs. Collectors now treat the years from about 1966 until the early ’80s as the low point of Fender quality, and “pre-CBS” became shorthand for the instruments worth paying up for.

Each cut probably looked reasonable in a budget meeting. Taken together, they used up the one asset CBS could not put on a balance sheet: the trust of players. Bill Mendello joined the accounting department of the CBS Musical Instrument Division in 1978. According to his NAMM oral history, the Fender guitar business had by then been “neglected for several years.”

How Insiders Bought Back a Brand Without Its Factory

CBS hired Bill Schultz to fix the guitar business. When the network decided to sell, Schultz, who by then ran CBS’s musical instruments division, put together a team with Mendello to buy it. The sale closed in March 1985. CBS booked a $38 million loss, the Los Angeles Times later reported.

The deal did not include the production facilities in Fullerton. What the buyers got was the name, the designs and their own understanding of what had gone wrong. They outlined a five-year plan to make Fender an industry leader again. By 1996, Fender held an estimated 50% of the U.S. solidbody electric guitar market on 1995 sales of $160 million. By 2000, sales had reached $280 million.

What a Buyer Won’t Pay For

The lesson for anyone selling a company they built is that the check shows what the buyer knows how to measure. CBS could measure output, unit costs and margins. It had no way to put a price on craftsmanship or on Fender’s relationship with players, which together supported the premium, so it cut both to save money. The employees saw that value. That is why they could buy back a weakened brand for less than CBS paid and turn it around.

Founders considering an offer should ask what the acquirer plans to cut by year three, and who on the buyer’s side sees why those things matter. If the answer is nobody, the day the deal closes may be the high point for the business. One thing tells you the most about any deal: whether the people who hold the know-how come with it.

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