Macadamia nuts," mutters Thomas Kron, checking on the daily shipment that has just arrived from Hawaii. Then, white lab coat flapping, he marches to the mixing area. Satisfied with the temperature and texture of a vat of velvety liquid chocolate, he announces, "Everyone on cherries." Immediately two white-coated assistants hand-feed cognac-soaked cherries to a conveyor belt. Chocolate flows down a funnel, covering the rows of passing fruit. From the main floor comes the faint crunching of pleated paper cups, as women pack the fresh chocolates into handmade wooden crates, the distinctive packaging, of Kron Chocolatier Inc.

Thomas Kron's passion is to make and sell fine chocolates, using techniques and recipes he says were handed down through five generations of his family in Hungary. If the 35-year-old chocolate maker's craftsmanship stems from his old-world heritage, however, the method he has used to expand his business has been all-American.

Kron has relied on franchising to build a nationwide chain of chic confectionary boutiques. In 12 major markets, these shops bear Kron's name and sell only his products -- all made in his Manhattan factory and shipped daily to each outlet. He hasn't had to invest a penny to set up this retail network; aside from some accounting and legal fees, all the capital was provided by investors eager to own and run a Kron Chocolatier.

Kron, however, has made some serious blunders in setting up his franchise operation, some of which have come back to haunt him. They occurred perhaps because his concern for his craft outweighed his business acumen. The result is an approach to franchising that at least one expert has characterized as a throwback to the 1950s, when franchisors were still refining their operations through a costly trial-and-error process.

But for now the system runs profitably. Last year, his 15-employee, semiautomated manufacturing operation generated an estimated $3 million in revenues. His sales have increased sevenfold in 10 years. And by leaving retailing and local promotion to his network of owner-managers, says Kron, he has been able to keep his own business a family-style operation. And he can concentrate on what he loves best -- making and packaging his chocolates.

The Kron family name was synonymous with the fine chocolates for more than a hundred years, until the disruption of the Nazi occupation and the later Communist takeover of Budapest. The family emigrated to the United States during the 1956 Hungarian uprising, when Tom was 10 and his brother, Andras, was 8. Their father set up a small chocolate shop, but with his poor command of English and a lack of familiarity with American retailing methods the business soon folded.

In 1972, after three years of medical school convinced him he didn't want to be a doctor, Tom took up the family calling. Although he had only $200 in capital, he did have the Kron recipes -- and the conviction that Americans would respond eagerly if they were offered something better than the heavily sugared, artificially flavored chocolate being mass-produced at the time.

Kron insisted on locating in New York's fashionable Upper East Side, even though it meant setting up both a manufacturing facility and a retail outlet in a tiny unfinished basement. He is proud to say that he priced his chocolates at five times the cost of most American chocolates. (His confections currently go for as much as $25 a pound.) But Kron was convinced his product was worth it. "I've always given may customers the best," he says. "No oils. No artificial anything. I use pure cocoa butter and the world's finest cocoa beans."

The choice of location and pricing strategy paid off. "From day one, we were crowded," he says. Such early customers as television journalist Barbara Walters, an East Side neighbor, helped spread the word. Kron confections soon attracted such other famous chocolate fanciers as Elizabeth Taylor. "She loves our chocolate-covered strawberries," says Kron.

Inspired by the response, Kron began to make imaginative specialty items. Customers took chocolate golf balls and tennis rackets away on weekends or presented friends with chocolate magnums of champagne or chocolate telephones. One rock star had himself sculpted in chocolate. For special occasions, customers could order chocolate-dipped fresh strawberries nestled together in chocolate baskets, or greeting cards with personal messages inscribed in colored icing. Kron staples included life-size female torsos and a life-size gartered leg.

Kron sold $250,000 worth of chocolate his first year and was sure he would do even better if he could only move to classier quarters and expand his manufacturing operation. Proud of his growing volume and profits, he was flabbergasted when commercial loan officers seemed unimpressed by his major assets -- the secret recipes and a tradition of European craftsmanship. "Banks just weren't receptive," he says.

Finally, Kron connected with a loan officer named John Whaley at Morgan Guaranty Trust Co. "Usually we didn't even see people who wanted less than $50,000," says Whaley. "But Tom was so persistent, and my portfolio was solid, so I finally lent him $25,000 to get rid of him. He opened on Madison Avenue and paid back the whole loan three months later."

Kron's growing reputation attracted a number of would-be dealmakers with various schemes for making him a millionaire. At first he was content to run a simple family operation, keeping his finger in every chocolate pot and talking informally with customers and suppliers. Andras supervised the molded chocolates and special orders, and Tom's wife, Diane, designed the store layout, displays, and packaging, all the way down to the hot pink and purple Kron shopping bags.

In a few years, Kron began thinking more seriously about expansion. But he couldn't figure out how to break into promising new markets without sacrificing the quality he was convinced came from his personal supervision. One day in 1975, a man walked into Kron's store, delivered the usual raves about the products, and began to talk excitedly about their sales potential in Florida. He had already sniffed out a lease in the prestigious Bal Harbour shopping area and proposed setting up a shop exactly like the New York outlet, selling Kron's products exclusively. He would, he said, give Kron a fee and provide whatever start-up capital was necessary if Kron would give him the Florida franchise.

"I didn't even know what franchising was," says Kron. But the proposition sounded intriguing. It would allow him to increase his sales and reach a brandnew market without raising capital or selling out. With the franchise fee he would have enough cash to keep production ahead of increased demand. He could control the manufacturing and quality, and the franchisee would build a business of his own around a proven product line, a distinctive image, and a reputation that had begun to spread.

Besides, Kron liked and trusted the Florida businessman. He asked customers for recommendations for a lawyer and quickly had a contract drawn up.

That first agreement in 1975 set the stage for seven years of growth through franchise sales. But it also planted the seeds for some nightmarish problems. For the time, though, Kron forged ahead. In 1977, he sold his own New York shop as a second franchise to Creighton Moeller, and in 1978 banker John Whaley joined as a partner. Kron opened a facility devoted entirely to manufacturing and product development. By the end of 1981, with an average addition of two franchises a year, Kron and established 12 small retail outlets in prime locations, including Beverly Hills, San Francisco, Highland Park Village in Dallas, Water Tower Place in Chicago, Mazza Gallerie in Washington, D.C., and the Borgata shopping mall in Scottsdale, Ariz.

Kron likes the franchising concept. Having the stores depend on him as a supplier allows him to maintain quality control. "We're charging the highest prices," he says. "Customers should be getting the best quality." That's one reason he refused a California conglomerate's offer in 1980, when revenues hit $1 million, to buy him out for $3 million.

At first Kron was impressed with the offer, then appalled. "Before we went to contract they sent men in three-piece suits to inspect every inch of my factory," he says. "The talk was all about how to increase my volume and profit margins. The corporate mentality doesn't understand. If I can't get the best quality apricots, I don't dip apricots. If my molded candies have nicks or bubbles, I don't want them shipped. This chocolate has my name on it."

Besides giving him control over quality, franchising has extended Kron's reputation, created demand for new products, and increased revenues. Nonetheless, his first agreements, trustingly uncomplicated and direct, contained enough loopholes for a textbook on how not to draw up a franchise contract.

Kron sold the Florida franchise for a modest $12,000. Convinced he would do well if he made his franchisee strong, the agreement was essentially: "I supply, you sell." Beyond that, it rested on a personal understanding that the franchisee would operate his business with the same taste, care, and drive as Kron would. Unlike most franchise operators, Kron asked for no royalty on product sales, and he required no specific inventory or minimum sales.

The first franchisees were given their territory -- usually an entire state -- with no restrictions on developing new business or opening new outlets; nor did Kron require them to expand. And, since Kron's advertising was limited to sending free samples to celebrities who would talk them up, he required no advertising from his franchisees.

When potential investors kept appearing unasked at the factory, Kron began to realize his name was worth more than the original negotiations suggested. As sales went up -- dramatically in New York -- he realized he had been foolish not to set royalties. Without royalties, he had lost a prod for shops that seemed to be selling below potential.

There were other unanticipated problems. After the Beverly Hills shop was established, an investor came along, cash in hand, eager to open in San Francisco. Kron could have kicked himself for selling the franchise for the entire state for only $12,000; to open the northern outlet he had to renegotiate for the California rights. And as the New York operators began doing a brisk business with corporate accounts, Kron wondered whether he should have at least reserved the right to deal directly with major hotels.

Although Kron's contracts are written for a 20-year term, he gets a chance to revise them for each new franchisee. He has learned some lessons as he has gone along, even if his mistakes have caused him to switch lawyers five times in seven years. In some respects his experience is similar to many franchise operations in early growth stages. When the business feels pressure to expand, fees are lower and terms tend to be looser. As it becomes more established and profitable, more is asked of franchisees.

Today a Kron franchise costs from $25,000 to $75,000; a potential investor must be able to lease a prime retail location and provide from $100,000 to $150,000 in start-up capital. The contracts now specify royalties of 2% to 5%, depending on the initial franchise fee. Minimum sales are also negotiated, but these are bare minimums, which Kron contends -- and his franchisees agree -- any retailer should surpass.

Still, the provision guarantees Kron base revenues and provides some assurance that franchisees won't suddenly decide their shops are only hobbies. New franchisees must also spend $4,000 per year on advertising, and Kron retains some rights to sell to hotels. The amended contracts stipulate that each franchise fee covers only one store, but they give the franchisee first rights to open another outlet for an additional $20,000.

While these new contracts do give Kron greater control over his business, the ultimate success of any of his shops depends on the person he chooses to run it. He receives 20 unsolicited queries a month from new prospects and looks, he says, "for someone with vision, not a mom-and-pop operator who's content to make a nice living. I want someone who's going to get involved and make the business grow. If they grow, I grow."

"We're involved every day with manufacturing and quality," adds Andras Kron, who now runs a separate four-employee facility to handle special orders. "We can't be constantly running around checking up on the stores, so it's essential to have complete confidence in the person who holds your franchise. You want someone who shares your same feeling for the business and the way it should be run."

In practice this means that Kron selects his franchisees on the basis of personal chemistry. "I either like the person or I don't," he says.

For prospective shop owners who hit it off with Kron, obtaining a franchise is not difficult. Take the case of Michael Stein, a young lawyer who plans to open a Kron outlet in Town Center regional mall in Stamford, Conn. Stein, a partner with his wife in a chain of Detroit beauty salons, is expanding his salon business in the east. A lover of Kron chocolates, he wanted to open a Kron Chocolatier at the same time. The two men met in New York. Stein located space, Kron received Stein's financial statement, and the Connecticut franchise deal was complete.

"Kron is the kind of entrepreneur who keeps moving toward his major objectives," says Stein. "He doesn't get hung up on details or kill deals over small issues. He's still growing, and you don't grow by hard-nosing franchisees. His whole attitude is, let's make money together. If there's good personal rapport, Kron makes a good-faith investment."

But this seat-of-the pants approach to the complex business of franchising has also gotten Kron mired in some very sticky situations, as the Florida franchise illustrates. In the summer of 1980 the original franchisee in Miami approached Kron with two partners who wanted to purchase the Miami store. "I met these gentlemen," says Kron, "and they seemed perfectly fine." On August 7, Kron and the new partners reached an agreement for the Miami store.

Today, less than two years later, Kron and the Miami store owners are engaged in a bitter dispute, resulting in charges and countercharges, suits and countersuits. Kron has filed suit in federal district court in New York City seeking $22,000 in payments he says are owed him by the Miami owners. The franchisees, in turn, are countersuing for breach of contract, fraud, and violation of Federal Trade Commission disclosure requirements. Not your model franchisor-franchisee relationship.

The trouble apparently started with a letter Kron sent to his franchisees in September 1980. The letter read:

Due to the unprecedented increase in raw material costs which we were unable to pass along, we are faced with demands by our creditors for immediate payment which we cannot meet. As consequence, we are in the process of declaring Kron Chocolatier Inc. in bankruptcy. We respectfully request the payment of all outstanding invoices regardless of the 30 day credit immediately, because the viability of your individual franchise is at risk.

Kron's current attorney, Neil Goldman, says that the purpose of the letter was to prod franchisees to pay more promptly for Kron's products. Whatever the intended effect, says Richard Friedman, attorney for the Miami store owners, the letter caused the new owners to panic. "Their first thought," says Friedman," was 'what's going on here?' Their second thought was to wonder just where they were going to get their products if Kron himself were to disappear." Friedman points out that when Kron's letter arrived, the Miami owners had been in their new store only seven weeks.

During the months that followed, relations between Kron and his newest franchisees deteriorated. Kron claims that it was around this time that he discovered that the Miami store was buying and selling unauthorized products from a local supplier. The Miami store owners, through their attorney, deny the allegations and claim that, in fact, it was at this time they began to suspect that franchisor Kron was overcharging for products being shipped to them.

Matters came to a head in April 1981, when Kron refused to ship any more of his products to the Miami franchise. "At this point," says Friedman, "my clients did began to buy from other suppliers. It was either that or close the business."

Five months later, in September, Kron appeared with his attorney in federal court in New York City seeking an injunction to keep the Miami store from using Kron's name any longer. The court refused to grant the injunction, but it did order the store in Miami to display a sign alerting shoppers that Kron's products were not being carried on the premises.

As of now, only the attorneys are benefiting from the dispute. The Miami store owners cannot obtain Kron's products -- the very thing that attracted them to the business in the first place -- and are spending considerable sums of money pressing and defending litigation. Kron himself has spent more than $100,000 on legal fees alone thus far. Perhaps more important, Kron's name continues to appear on a storefront in Miami that doesn't carry his products and that should be contributing significantly to his profits, but isn't.

Although Kron has had similar problems with at least one other franchise, in most of his franchises he has been lucky. The New York shop owners exemplify the entrepreneurial spirit Kron claims he seeks. John Whaley, the banker who arranged Kron's first loan, now owns the two Madison Avenue shops with a partner. Last year they spent more than $80,000 in print and radio advertising, built up corporate accounts, and developed a mail-order operation. Their investment in a slick four-color catalogue produced single orders ranging from $10 to $5,000 from all over the United States and Europe, and they plan to open two additional Kron Chocolatiers in Manhattan. Whaley is very satisfied to be a Kron's franchisee. He enjoys the fact that "you never know who's going to be in here" and likes passing time with such celebrity regulars as David Frost, Cicely Tyson, and John Denver. "My sales volume and profits have grown every year," he says. "And there's so much untapped potential. This business is an infant that hasn't even started crawling."

But Whaley agrees that Kron's approach to selecting franchisees is ingenuous and impulsive. "Tom's dedicated and shrewd," he says, "but he can be as nutty as one of his own chocolate-covered macadamia nuts. He's built a half-million-dollar company from scratch; his products are marvelous, and he's wonderful at merchandising and promoting. When he strolls down Madison Avenue in his tuxedo, giving out chocolate hearts, people are eating out of his hand and rushing in to buy us out. But the Florida fiasco will cost him dearly."

Whaley is keenly aware of what is going on with all the other Kron outlets. Two years ago he organized a group of Kron franchisees, which performs many of the functions -- such as buying supplies in bulk -- that are usually handled by a franchisor. The group meets on a regular basis to discuss products, marketing strategies, and any difficulties they may be having with each other or with Kron.

One problem the franchisees don't have is overzealous supervision. Kron says he can't visit his shops as much as he wants to. "We have no organization for that," he says. "I come in at five in the morning and do everything. I don't have anyone who knows as much about the business as I do."

Kron's goal is to build 20 franchisees -- the number he feels he can control adequately. And while his franchise contracts are now stronger, his methods of selection are as instinctive as ever. He never runs a credit rating on potential operators. "I'm not looking for people who are rich," he says, "I'm looking for people with enterprise." Nor is he concerned with developing a business with future growth. "What I'm worried about," he says, "is the day I'll no longer be able to get good cocoa beans."