(FORTUNE Small Business) – In a few months, the new Krispy Kreme store in WEST PALM BEACH, Fla., will open, and until then James A. Cosentino is counting the seconds. Cosentino, a native of Buffalo, is part-owner of that store, and because he already owns two other Krispy Kreme locations, he has a pretty good idea of what he can expect come opening day. At 5:30 that morning, he'll let in a mob of people who've been waiting outside for hours for the warm doughnuts streaming from his ovens at a rate of 2,640 per hour. The event will probably be covered by a TV news crew--most Krispy Kreme openings are--and in his first week Cosentino will take in almost as much in revenue as the typical Dunkin' Donuts store makes in a year.

In case you haven't noticed--Dunkin' Donuts likely has--North Carolina-based Krispy Kreme has become a full-fledged phenomenon in the food business. Launched in 1937 by Vernon Rudolph, a Southern entrepreneur with a secret French doughnut recipe and a Pontiac, the company went unnoticed for decades before it expanded nationally in the mid-1990s, in part through franchised locations like the ones Cosentino owns. It held a public offering in April 2000, and since then its stock is up about 300%. For fiscal 2002, the chain took in $394 million in revenue, and sales for locations open at least 18 months were up almost 13%, impressive in the fast-food or any other retail business. No wonder Cosentino is impatient for the Florida store to open.

But if you think the doughnuts are popular, you should see the line of people trying to get a piece of the business. Krispy Kreme isn't signing on any new franchisees right now (it plans to in the next 18 to 24 months), yet about 500 people call or e-mail each week to ask for applications. That's even more surprising when you realize how much the stores cost--almost $2 million on average, which is an order of magnitude more than other fast-food places. Even McDonald's, the McDaddy of all franchises, costs far less, topping out at about $750,000 per location. And assuming you have $2 million to open a Krispy Kreme, and the required restaurant experience, you still have to campaign like a Senate candidate to get accepted. Cosentino has worked in the restaurant industry for 30 years and owns 19 T.G.I. Friday's and six Denny's locations. Even so, it took him two years and three trips to the company headquarters before he finally got the nod. Kevin Gordon, an ex-banker who specialized in lending to franchisees, called every business day for six months before winning a contract to open nine stores in his hometown of Houston.

All of which makes you wonder--do these people really know what they're doing? Can any doughnut shop, even one this popular, actually be worth $2 million? To find out, we spoke to dozens of franchising experts and went through the numbers ourselves, comparing Krispy Kreme's initial investment and operating expenses with those of similar franchises. The answer? Yes, it really is worth that much--for now, at least.

All companies are required by the Federal Trade Commission to tell prospective franchisees exactly how their businesses operate, through a phone-book-sized document called a uniform franchising offering circular (UFOC). In the Krispy Kreme UFOC, some of the requirements aren't too surprising. For example, the company charges a nonrefundable $40,000 fee that's akin to membership dues--it gives you the rights to a specific location for 15 years. Dunkin' Donuts charges $40,000, and Tim Horton's, a Canadian doughnut franchise owned by Wendy's Corp., charges $35,000. The Krispy Kreme contract also requires that all franchisees give the company 4.5% of their total sales as a royalty fee, plus 2% to help pay for brand development and public relations costs. In the franchise business such fees are fairly standard.

But other aspects of the Krispy Kreme application are more daunting. For example, you need $5 million in net worth to apply, and you also need "ownership and operating experience of multi-unit food service operations." So forget the archetypal franchisee--the middle manager who took early retirement from Xerox. In addition, the company wants only "area developers," mega-franchisees who commit to opening at least ten stores in a given region. (Outback Steakhouse uses a similar arrangement.) In part, that allows the company to expand more quickly. Its 23 current area developers are contractually bound to open 250 stores by 2007. But there's another reason. "Krispy Kreme is doing so well, they don't want to take the chance of giving it to a mom-and-pop," says George A. Naddaff, former chairman of Boston Chicken, who now invests in early-stage franchise companies.

If your application is approved, you can expect to pay about $1.35 million to open a Krispy Kreme, which covers furniture and fixtures, the doughnut-making equipment, and your initial inventory (sacks of things like dough conditioner and malted barley flour). That's about five times what the International Franchise Association considers standard for most operations, and it doesn't even include the real estate. That will tack on another $500,000 or so, depending on what city you're building in, which brings the total to nearly $2 million per location, making Krispy Kreme the costliest food franchise available. The doughnut equipment alone costs $350,000--for that amount of money you can buy a Dunkin' Donuts, a Cinnabon, or two Manhattan Bagels stores.

Once you open the doors, though, the flow of money reverses course--and fast. Gerard Centioli, an area developer in the Pacific Northwest, holds the record for highest first-week sales in the U.S.; his Issaquah, Wash., store took in $454,000. But because the stores are so wildly popular right now, just about every new location that opens resets the record. Krispy Kreme COO John W. Tate says there's typically a 12-month honeymoon period, and after that the business starts to settle to a pace that's more manageable but still impressive. In its 2001 annual report, Krispy Kreme says the average week for a franchise is $43,000 in revenue, which works out to $2.2 million a year. The 2002 annual report was not released by press time, but Tate says the per-store revenues for area developers have gotten higher, averaging $60,000 to $70,000 a week, or $3.4 million a year, and one store outside Denver did $8 million.

"Those are big numbers," says Timothy Bates, an economics professor who studies franchising at Wayne State University in Detroit. "They're on the extreme high end of fast-food franchises." The typical McDonald's takes in about $1.5 million a year, according to industry experts. Dunkin' Donuts averages $744,000; Cinnabon posts $408,000 per site; and Auntie Anne's (a pretzel store) averages $395,000.

In addition to the volume, though, Krispy Kreme tends to have higher profit margins than other fast-food businesses. Michael Shepardson, the president of CNL Advisory Services, a boutique investment bank in Orlando that helps restaurant owners, says the typical chain has cash-flow margins of 10% to 15%, but at Krispy Kreme the number is more like mid-20s. That's because just about every store does both retail and wholesale business, explains Krispy Kreme CEO Scott A. Livengood, who says he considers the stores more like manufacturing plants than bakeries. They're running 24 hours a day, and they're built to produce enough doughnuts for walk-in customers, plus wholesale distribution to places like supermarkets and convenience stores. "Like any other manufacturer, idle equipment is not profitable," says Livengood, whose name is probably apt right now.

It's a formula of high volume plus high margins, and to understand the end result, consider Jim Morrissey, who has an impressive background even in the rarefied air of Krispy Kreme developers. Morrissey has spent 27 years in the restaurant business, and until a few years ago he co-owned nearly 100 franchises, including Bruegger's Bagels, KFC, and Godfather's Pizza restaurants. After getting a contract to open 15 Krispy Kremes in six states, he sold all the others. "It was an easy decision," he says. "I still shake my head over the sales-per-unit numbers. I've never seen anything like it." Think of it this way: Morrissey pegs his revenues at about $3.5 million to $4.5 million per store. Assuming margins of 20% (that's conservative), his stores take in $700,000 in profit every year. For 15 stores, that's $10.5 million. Of course, this is only a back-of-the-napkin calculation, but it underscores why investors like Morrissey or Cosentino have no problem signing on to open ten or more stores in a region.

Before you head down to North Carolina to camp out in front of the company's headquarters, realize that there are a few catches. For one thing, you'll have a partner: Krispy Kreme Doughnuts Inc. Until a few years ago, it seems even the company itself didn't realize how profitable the franchise locations could be. But that has recently changed, and Krispy Kreme now takes an ownership stake in all new franchises, claiming anywhere from 33% to 75%, according to Philip R.S. Waugh, senior vice president of franchising. The company currently has joint venture deals with nine area developers, and it owns a majority stake in three markets: Northern California, New England, and Philadelphia.

Other franchisees typically own their business outright, but not always. McDonald's started offering similar joint venture deals in the mid-1990s. The parent companies engage in such partnerships because they lead to higher earnings and faster expansion (though in this case, Krispy Kreme franchisees have the money and desire to open as many stores as the company will allow). Fundamentally, however, the reason Krispy Kreme operates this way is, well, because it can. "If it's the only way to get more territory, we'll do it," says Morrissey.

That joint-partnership structure has already led to a lawsuit. According to court filings, two partners, Kevin Boylan and Bruce Newberg, claim they entered into a deal where they would open stores in Northern California and own 44% of the overall business. They were set to hand over their portion of the startup costs, but they say Livengood, the CEO, then decided that he wanted a significant cut for his personal investments. The terms of the deal were changed so that Livengood would own 26% of the holding company, and Boylan and Newberg's stake was cut in half. They filed a breach-of-contract lawsuit, asking for $10 million in damages. Through their lawyer, the two declined to comment, and the case could go to an arbitration hearing in the next few months. In response, Livengood says they never had a contract and declined to comment further.

Similarly, 35 Krispy Kreme executives (not the corporation) formed an equity fund in 2000 to invest in franchise stores, something they'd started doing before the company went public. But in the wake of the Enron scandal, management took steps to ensure that no individual's personal gain would conflict with the overall good of the company. It paid about $1 million this past March to buy out the equity fund. According to Waugh, Krispy Kreme executives no longer hold personal investments in the franchise stores.

Of course, the company may take less of an interest in specific franchises if the novelty factor wears off. What Krispy Kreme is selling, after all, is only a doughnut (granted it's a smaller, sweeter one). Livengood says he's not worried. There are still just 217 locations in the country, compared with 5,500 Dunkin' Donuts and 30,000 McDonald's locations. And although the company plans to open about 750 Krispy Kremes--at least 250 under franchise contracts in the next five years--that's still not a lot in the fast-food business. Subway opens nearly 1,000 restaurants annually.

The bottom line? Two million dollars may sound streep, but it's actually a fair price for a Krispy Kreme store right now. Sure, tastes change, and there's a decent chance the country could go on another health kick (in which case those glazed calorie bombs may not seem so appetizing). But for the foreseeable future, people will still continue to line up, especially whenever a Krispy Kreme store turns on its hot light--a neon sign that glows whenever warm, fresh doughnuts are ready. Every location has one. "It's like a big bug zapper," says Miami attorney Robert M. Einhorn, who specializes in franchise law. "Humans are attracted to that light."