In this case I think you'll first need the external HD to have Mac OS installed on it. Using something like Carbon Copy Cloner or Super Duper to Clone a drive volume from another Mac that has a OS X version that is compatible with the iMac with the dead HD. Then you'll start up the connected external HD and turn on the iMac while holding down the option key. The external HD should show up on the boot screen for you to select. Once you have a desktop you should go to System Preferences/Startup Disk and select the external HD if it isn't already selected.
After that the iMac should just boot to the external HD as long as the external HD is discoverable. I would always turn on the external HD first. There are a few things that you won't be able to do such as booting into Windows using Apple's Bootcamp. Your friend might also want to later clone another external HD in case the booting HD develops issues some day.
Personally, I wouldn't mess with it unless it's a steal.