Know-How vs Trade Secret
Know-how vs trade secret — what each is, why protection regimes differ, and how founders, CFOs, and PE buyers value tacit knowledge in M&A and lending.
Introduction
Two of the most valuable, and most often overlooked, intangible-asset categories sit deep inside knowledge-based businesses: know-how and trade secrets. Both refer to information held by the entity that creates competitive advantage. Both are typically internally generated. Both are routinely under-recognised and under-valued in routine accounts. The two are sometimes used interchangeably in casual conversation, but the legal protection and the valuation discipline differ in important ways.
Know-how is practical, technical, or business knowledge developed by an entity through experience — production techniques, operating processes, training materials, manufacturing tolerances, recipes, formulations, and similar non-public information that provides competitive advantage. Know-how is broader than trade secret; it includes information that may not meet the strict secrecy requirements of trade-secret protection.
Trade secrets are a specific legal category — information that meets three statutory tests: secrecy (not generally known or readily accessible), commercial value (deriving from secrecy), and reasonable protection (the holder has taken reasonable steps to keep it secret). Trade secrets are protected under specific legal frameworks: the EU Trade Secrets Directive 2016/943 in UK and EU jurisdictions, and the US Defend Trade Secrets Act 2016 plus state-level Uniform Trade Secrets Acts in the US.
This comparison gives the practitioner — founder, CFO, PE buyer, IP advisor — a clean view of both: what each is, how they differ in protection, and how each is valued in M&A, fundraising, and IP-backed lending contexts.
TL;DR: Know-how is practical, technical, or business knowledge developed by an entity — production techniques, operating processes, training materials. Broader than trade secret. Trade secrets are a specific legal category requiring secrecy, commercial value, and reasonable protection. Both are typically internally generated (prohibited from balance-sheet recognition under IAS 38) but recognised at fair value when acquired under IFRS 3. The valuation methods overlap — RFR and cost approach dominate — but the documentation requirements diverge.
Know-How
Know-how is the practical, technical, or business knowledge held by an entity that produces commercial advantage when applied. It is broader than trade secret and often includes information that is partially known to others, partially documented, or partially shared with third parties under controlled conditions.
The category covers a wide spectrum: manufacturing processes, production tolerances, recipes and formulations, training materials, troubleshooting protocols, vendor selection criteria, customer onboarding sequences, pricing methodologies, sales scripts, project-management templates, and similar institutional knowledge.
How know-how gets recognised
Under IAS 38 paragraph 8 (UK and global IFRS), know-how can be an intangible asset where it meets the identifiability test — separable (can be sold, transferred, licensed) or arising from contractual or legal rights. In practice, recognition follows the same asymmetry as other intangibles:
- Internally generated know-how: generally prohibited from balance-sheet recognition under IAS 38 paragraphs 63-67 (alongside brands, customer lists, mastheads) — the cost of generating the know-how cannot be reliably distinguished from the cost of operating the business
- Acquired know-how: recognised at fair value under IFRS 3 (UK and global) or ASC 805 (US) where it is identifiable as a discrete asset distinct from goodwill
What can be recognised in a typical PPA
- Documented manufacturing know-how transferring with a production facility
- Formulations, recipes, or operating procedures documented in a transferable form
- Training materials, manuals, and process documentation
- Vendor relationships and supply-chain know-how where contractually transferable
What auditors look for in know-how recognition
- Documentation evidence — the know-how exists in a transferable, identifiable form
- Distinguishability from goodwill — what specifically transfers, and how
- Useful-life assessment based on the rate of know-how obsolescence in the relevant sector
- Valuation method appropriate to the form of know-how (typically cost approach for documented processes, RFR for know-how with licensing comparables)
A UK specialty chemicals manufacturer is acquired for £28m. PPA identifies £3.2m of know-how — comprising documented manufacturing processes, quality-control protocols, and supplier relationship documentation. The valuation team applies the cost approach (reproduction cost of the documented know-how, less obsolescence), supported by an RFR cross-check using comparable manufacturing licensing data. The £3.2m is amortised over 8 years (the assessed useful life of the documented process knowledge in the sector).
Trade Secret
A trade secret is information that meets three statutory tests under the EU Trade Secrets Directive 2016/943 (transposed into UK law via the Trade Secrets (Enforcement, etc.) Regulations 2018) and equivalent US frameworks (Defend Trade Secrets Act 2016; Uniform Trade Secrets Acts at state level):
- Secrecy — the information is not generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question
- Commercial value — the information has commercial value because it is secret
- Reasonable steps to protect — the person lawfully in control of the information has taken reasonable steps under the circumstances to keep it secret
The three tests are cumulative. Information that fails any one of the tests is not a trade secret, even if it might still qualify as know-how.
How trade secrets get recognised
Trade secrets are recognised as intangible assets under the same IAS 38 / IFRS 3 / ASC 805 framework as other intangibles. The same internal-generation prohibition applies — most internally generated trade secrets are not recognised on the holder's balance sheet. Acquired trade secrets in a business combination are recognised at fair value.
The recognition challenge is identification. A trade secret by definition is not documented in public form. The PPA team needs to identify the specific items of secret information, evidence the protection measures, and value the resulting commercial advantage.
What auditors look for in trade-secret recognition
- Evidence of the three statutory tests — secrecy, commercial value, protection
- Documentation of the protection measures (access controls, NDAs, employee confidentiality agreements, security protocols)
- Identification of the specific trade secret rather than a general reference to "proprietary information"
- Useful-life assessment — trade secrets can have indefinite useful life so long as the secrecy is maintained, but the practical useful life is often limited by reverse engineering, employee departures, or sector evolution
Typical trade-secret valuation methods
- Relief from Royalty (RFR) — comparable trade-secret or know-how licensing rates applied to projected revenue from products or processes embodying the secret
- MPEEM — where the trade secret is the primary driver of identifiable cash flows
- Cost approach — where the cost to reverse-engineer or replicate the trade secret can be estimated
- Income approach via competitive differential — projecting the margin differential attributable to the trade secret
A UK food and beverage business is acquired for £52m. PPA identifies a trade-secret recipe and proprietary manufacturing process — known to fewer than 8 employees, subject to NDAs and access-controlled documentation, evidenced as commercially valuable by the price premium achievable for the products. The valuation team applies MPEEM, isolating the excess earnings attributable to the trade secret after contributory-asset charges for brand, customer relationships, and tangible assets. The resulting fair value is £9.4m, classified as indefinite-life (with annual impairment testing under IAS 36) given the continuing protection measures and absence of reverse-engineering risk.
Side-by-Side Comparison
The table below contrasts know-how and trade secret across the dimensions that matter for valuation, M&A diligence, and IP-backed lending.
| Criterion | Know-How | Trade Secret |
|---|---|---|
| What it is | Practical, technical, or business knowledge developed through experience | A specific legal category — information meeting secrecy + commercial value + reasonable-protection tests |
| Scope | Broader — includes information not strictly secret | Narrower — strict legal definition |
| Legal framework (UK/EU) | Contract law (NDAs, confidentiality clauses); not a discrete statutory regime | EU Trade Secrets Directive 2016/943 (UK Trade Secrets (Enforcement, etc.) Regulations 2018) |
| Legal framework (US) | Contract law (confidentiality, employee agreements) | Defend Trade Secrets Act 2016; Uniform Trade Secrets Acts at state level |
| Secrecy requirement | Not strictly required; partial knowledge to third parties is permissible | Required — must not be generally known or readily accessible |
| Commercial value requirement | Practical commercial use sufficient | Commercial value must derive specifically from secrecy |
| Protection requirement | Reasonable confidentiality measures typical | Statutory test — must have taken reasonable steps to keep it secret |
| Typical content | Documented processes, recipes, training materials, vendor relationships | Recipes, formulations, source code, customer lists with protected status, algorithms, manufacturing processes |
| Documentation form | Often documented in transferable form (manuals, SOPs, templates) | May or may not be documented; documentation must be access-controlled |
| Internally generated recognition | Prohibited under IAS 38 paragraphs 63-67 (alongside brands, customer lists) | Same — prohibited under IAS 38 |
| Acquired recognition | Recognised at fair value under IFRS 3 / ASC 805 | Recognised at fair value under IFRS 3 / ASC 805 |
| Useful life — typical | Finite (3-15 years) based on rate of process obsolescence | Indefinite (if secrecy maintained) or finite (if reverse-engineering risk exists) |
| Valuation methods | Cost approach (documented processes), RFR (with licensing comparables) | RFR, MPEEM, cost approach, income approach via competitive differential |
| M&A diligence focus | Documentation transferability, useful-life assessment | Protection measure evidence, secrecy maintenance post-deal, employee retention |
| IP-backed lending | Secondary collateral — depends on transferability and documentation | Limited — secrecy requirement constrains lender collateral discipline |
| Loss-of-protection consequence | Documentation lifecycle continues | Loss of trade-secret status — fair value typically falls to zero or below |
| Common composition | Stand-alone or part of a documented operating system | Typically embedded in formulations, algorithms, processes — often coexisting with patents and know-how |
Where know-how and trade secrets overlap
The Venn diagram has a substantial intersection. A manufacturing process that is documented, kept confidential under NDA, and meets the three trade-secret tests is both know-how and a trade secret. A recipe that is documented in a transferable form but partially known to employees who have not signed NDAs may be know-how but not a trade secret. A formulation kept by a single chemist who has not documented it but who has been told to keep it confidential may be a trade secret but not transferable know-how.
The practical implication: most knowledge-based businesses hold both. The PPA team in an acquisition typically inventories the two together, identifies which items meet which definition, and applies the appropriate valuation method to each.
Know-how is the broader category — practical knowledge that creates commercial advantage. Trade secret is the narrower legal category — knowledge meeting strict secrecy, commercial value, and protection tests. Both are typically internally generated (prohibited from balance-sheet recognition) but recognised at fair value when acquired. The two often coexist within the same asset cluster, and the audit and valuation discipline differs.
Why the Distinction Matters
Three areas drive the practical importance.
M&A diligence depth. Buyers in M&A diligence test trade-secret claims against the three statutory criteria. A target claiming substantial trade-secret value must evidence the protection measures, the secrecy maintenance, and the commercial value differential. Know-how claims face a lower bar — documentation transferability is the principal test. Both warrant explicit inventory and measurement; lumping them together undersells the trade-secret components and overstates the know-how components.
IP-backed lending discipline. Trade secrets are challenging collateral for lenders because the value depends on continued secrecy — disclosure to the lender or its valuers can extinguish the asset. UK IP-backed lending propositions typically focus on patents, trademarks, and registered designs as primary collateral, with know-how and trade secrets supporting the narrative but rarely the headline collateral basis. Founders preparing for IP-backed lending should evidence the patent and trademark portfolio as the primary collateral, with trade secrets and know-how documented separately as supporting value.
Post-acquisition protection continuity. A trade secret acquired in a business combination remains a trade secret only if the acquirer maintains the protection measures. Failure to maintain access controls, NDA discipline, or employee confidentiality protocols can extinguish the trade-secret status and trigger an impairment. The acquirer's integration plan should explicitly address trade-secret protection from day one. Know-how is more forgiving — documented processes survive ownership transitions provided the documentation is preserved.
A UK specialty chemicals business acquired in 2022 carried £11m of identifiable intangibles attributed to trade secrets (formulations and proprietary processes). In 2025, two key chemists departed and joined a competitor. The integration team had not extended the NDAs nor strengthened the access controls post-acquisition. An impairment review concluded that the trade-secret status was at risk; the carrying value was reduced by £4.2m. The same risk would not have arisen for documented know-how — the documentation would have remained intact even after the chemists' departure.
FAQ
What is the difference between know-how and a trade secret?
Know-how is practical, technical, or business knowledge developed through experience. Trade secret is a specific legal category — information meeting three statutory tests: secrecy, commercial value, and reasonable protection. Trade secret is narrower than know-how. All trade secrets are know-how; not all know-how qualifies as a trade secret.
Can know-how and trade secrets be capitalised?
When acquired in a business combination — yes, both are recognised at fair value under IFRS 3 (UK and global) or ASC 805 (US). When internally generated — generally no, both fall under the IAS 38 paragraph 63 prohibition on internally generated brand-like intangibles. The internal-generation asymmetry creates one of the largest gaps between book value and enterprise value for knowledge-led businesses.
How are trade secrets valued?
Four methods are commonly used. RFR — comparable trade-secret or know-how licensing rates applied to projected revenue. MPEEM — where the trade secret is the primary cash-flow driver. Cost approach — the cost to reverse-engineer or replicate the secret. Income approach via competitive differential — the margin differential attributable to the secret. The choice depends on the nature of the secret and the available evidence.
What protection do UK trade secrets have?
UK trade secrets are protected under the Trade Secrets (Enforcement, etc.) Regulations 2018, which transposed the EU Trade Secrets Directive 2016/943 into UK law. The regulations provide remedies for unlawful acquisition, use, or disclosure of trade secrets. Common-law breach-of-confidence remedies remain available in parallel.
Can trade secrets last indefinitely?
Yes — trade secrets have indefinite legal protection so long as the three statutory tests continue to be met. Coca-Cola's recipe is the canonical example of a trade secret maintained for over a century. The practical useful life, however, is often constrained by reverse-engineering risk, employee turnover, or sector evolution.
What happens to a trade secret if it becomes public?
Loss of secrecy extinguishes the trade-secret status. The asset is no longer protected and the fair value typically falls to zero or near-zero. Accidental disclosure, employee leakage, or competitor reverse-engineering can all trigger this outcome. The IAS 36 impairment trigger is immediate.
Are know-how and trade secrets transferable?
Know-how is typically transferable in documented form — manuals, SOPs, recipes, training materials. Trade secrets are transferable but the transfer must preserve the protection measures; transfer to a party without NDA discipline can extinguish the secret. Licence agreements over trade secrets are common but require careful drafting to maintain secrecy at the licensee level.
How does IP-backed lending treat know-how and trade secrets?
Both are challenging collateral classes for lenders. Know-how can support the lending narrative where it is documented, transferable, and tied to specific revenue streams. Trade secrets are typically supportive evidence rather than primary collateral because the lender's valuation process can itself threaten the secrecy. UK IP-backed lending propositions (NatWest, HSBC, specialist providers) generally focus on patents, trademarks, and registered designs as primary collateral, with know-how and trade secrets supporting the narrative.
When to Seek Expert Support
The know-how / trade-secret boundary is one of the harder judgement calls in intangible-asset inventory work. Edge cases — acquisitions with substantial trade-secret value to defend, founder-led businesses where the founder's personal know-how is the asset, and cross-border deals where the EU Trade Secrets Directive and US Uniform Trade Secrets Acts must both be navigated — typically warrant specialist input.
Opagio's Asset Valuator module (within Opagio Intangibles) inventories know-how and trade secrets within a structured asset register that distinguishes the two on the documentation and protection-measure axes. Each item is valued using the appropriate method — cost approach for documented processes, RFR or MPEEM for trade secrets with comparable licensing or excess-earnings evidence. The output produces audit-trail documentation suitable for PPA, M&A diligence, and IP-backed lending purposes.
For founders preparing for fundraising, the inventory typically uncovers items the team has been treating as part of "general operations" but that meet the trade-secret or know-how recognition tests. The exercise often improves the protection discipline as a side effect — once a process is documented as a trade secret, the team is more likely to maintain the access controls and NDA discipline required to keep it one.
Book a demo: See how Asset Valuator inventories know-how and trade secrets, with valuation outputs that distinguish documented know-how from protected trade secrets. Book a demo or speak to our team.
Related Glossary Terms
Learn More
Ready to Value Your Intangible Assets?
Use Opagio's valuation tools to apply these methods to your own business.