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How to Work With Trade Secrets

Accountants are, in many ways, something like doctors or lawyers when it comes to their clients’ need for confidentiality. This is never more true than when you’re called upon to evaluate a client’s assets, only to find that a significant fraction of the company’s value lies in trade secrets. Trade secrets are the intangible assets a company has, and that it must keep secret for them to be valuable, and often make an honest valuation hard to develop.

The problem lies in assessing the cash value of something nobody can know about and that, by definition, no other companies have access to. Say you’re the financial analyst who’s auditing a shoe company prior to its initial public offering. It’s a matter of ethics and law that you must give your best estimate of the company’s total value, but right after you start, you find out the client has a secret method of making laces that’s still in the pre-patent stage and can’t be divulged yet. This can make putting a price on the secret technique difficult, especially if you’re not allowed to know too much about it.

New industrial techniques (in this case, making shoelaces) are just one type of trade secret. These usually wind up protected by a patent, and later audits can probably treat them like any other intellectual property. Some forms of intellectual property can’t be patented, or it would wreck the secret if they were, and they must remain secrets indefinitely. The secret recipe for Coca-Cola is the classic example of a trade secret no one can ever know. When pricing something like this, sometimes you have to use your judgment and admit you might be way off.

A trade secret is a type of business information that derives some or all of its value from its secret status. If you’re ever going to be invited to work with this kind of information, it’s especially important to respect every part of your nondisclosure agreement, as well as to invest in secure information handling so you’re not the one who leaks.

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