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Insights · 6 min read

Family Business Succession: Keeping the Business Going Across Generations

Why family businesses struggle to last across generations, how shares in a limited liability company are inherited, the role of the GMS, and how to prepare a successor early.

Pak Hendra (a pseudonym) grew a building materials distribution business from one small warehouse into a limited liability company (perseroan terbatas, PT) with several branches. He held the majority of the shares, served as president director, and every important decision crossed his desk. When he died suddenly, his three children inherited equal numbers of shares. The eldest had worked in the company for ten years, the second lived abroad, and the youngest had just graduated from university. At their first meeting, they could not even agree on who had the authority to sign that month's payroll cheques. (This illustration is fictional and anonymised.)

Situations like this are not rare. Family businesses are often strong because of their founder's closeness and speed in making decisions, but that same strength can become a weak point once the founder is gone.

Why many family businesses do not last

You may have heard the saying that only a small share of family businesses survive to the third generation. The most often quoted figures come from research by John L. Ward, published in 1987 in the book Keeping the Family Business Healthy. The study followed around 200 manufacturing companies in Illinois, United States, over several decades.

It is worth being honest about this: the sample was limited, the context is very different from Indonesia, and the figures are often misquoted. Ward himself pointed out the limits of his study. So it is better treated as a general warning than as a precise statistic.

What is more useful is understanding the pattern. In practice, family businesses usually falter not because their market disappears, but because of the following:

  • Ownership fragments without rules. Each generation adds more shareholders, while their interests grow more varied.
  • Leadership is not prepared. A successor is chosen by birth order or closeness, not by readiness.
  • The line between family and company blurs. Personal and company finances become mixed, and family conflict is carried into the boardroom.
  • The founder puts off the conversation. Succession is treated as taboo or as something for "later", until circumstances decide it.

Shares in a PT as inherited property

In a business set up as a limited liability company, what is inherited is not "the company" but shares. Shares are the personal property of their holder, so when a shareholder dies, the shares become part of the estate and pass to the heirs under the inheritance law that applies to the deceased.

Law Number 40 of 2007 on Limited Liability Companies, the Company Law (UU PT, some of whose provisions have been amended by the Job Creation Law (UU Cipta Kerja)), contains several important provisions:

  • Restrictions on share transfers do not apply to inheritance. Article 57(1) allows the articles of association to require that shares first be offered to other shareholders, or that a company organ approve, before shares are transferred. However, Article 57(2) states that these requirements do not apply to transfers of rights by operation of law, including inheritance, except for approval from the competent authority relating to inheritance. This means that, in principle, heirs cannot be prevented from becoming shareholders simply because other shareholders do not agree.
  • Recording by the board of directors. The transfer of shares needs to be recorded in the register of shareholders, and any change in the composition of shareholders is notified to the Minister under Article 56 of the Company Law.
  • Jointly owned shares. If a share is owned by more than one person, for example because an inheritance has not yet been divided, Article 52(5) of the Company Law provides that the rights arising from that share are exercised by appointing one joint representative.

There is also a family law side that is often forgotten. Shares acquired during a marriage may be joint marital property under the Marriage Law, so part of them belongs to the surviving spouse before the rest is divided among the heirs. For Muslim families, division follows Islamic inheritance law; for other families, it generally follows the Civil Code (KUHPerdata). This difference determines how many shares each heir receives.

The GMS: where decisions are really made

Once shares have passed, control of the company is exercised through the General Meeting of Shareholders (Rapat Umum Pemegang Saham, RUPS), or GMS. The GMS holds powers not given to the board of directors or the board of commissioners, including appointing and dismissing members of the board of directors and the board of commissioners, amending the articles of association, and approving the use of profits.

This is where succession problems often surface. When shares are split equally among several heirs without an agreement, the GMS can reach deadlock: no one reaches the quorum or enough votes to appoint a new board of directors. As a result, the company runs without lawful leadership, while banks, partners and employees wait for certainty.

Some steps worth considering while the founder is still active:

  • Reviewing the articles of association, including provisions on quorum, share classes and the mechanism for appointing directors.
  • Drawing up a shareholders' agreement covering voting rights, a share buy-back mechanism and deadlock resolution.
  • Clearly separating ownership (who holds the shares) from management (who runs the company).

Preparing a successor

Leadership succession and ownership succession are two different things. All the children can become shareholders, but not all of them have to, or want to, become directors.

Preparing a successor well generally covers:

  1. Agreed criteria. Education, work experience, including outside the family business, and the skills needed for a particular role.
  2. A real development path. Job rotation, mentoring and gradually increasing responsibility, not a sudden appointment.
  3. A role for family members who do not manage the business. They remain owners, with rights to information and dividends, and a forum to voice their views.
  4. An emergency plan. Who takes over temporarily if the founder is suddenly unable to act, including banking and signing authority.
  5. A planned transition period. A founder who steps back gradually and stays available as an adviser often makes the handover much smoother.

All of this needs to be aligned with the founder's personal inheritance plan, for example through a will, lifetime gifts or a particular ownership structure, so that the company's legal documents and the family's inheritance documents do not contradict each other.

Key points

  • The vulnerability of family businesses more often comes from unprepared ownership and leadership than from the market.
  • The "third generation" statistic comes from John Ward's limited 1987 study and is often misquoted; use it as a warning, not a precise figure.
  • PT shares are inherited property; Article 57(2) of the Company Law exempts inheritance from restrictions on share transfers in the articles of association.
  • Inherited shares that have not yet been divided are exercised through one joint representative (Article 52(5) of the Company Law).
  • The GMS can reach deadlock if shares are divided without agreement; the articles of association and a shareholders' agreement need to be prepared early.
  • Distinguish ownership succession from leadership succession.

If your family is starting to think about passing on the leadership and ownership of your business, Parampara can support you in drawing up a succession map through a consultation session.

This article is general information and not legal, tax or financial advice. Every family and company has different circumstances; consult a licensed professional.

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