I have almost exactly the same motor except its a year older. (1996) I had the same experience. Bought it used, it started and ran well but we couldn't get it to pump water on muffs in the seller's driveway so we shut it down after after a few seconds and I negotiated a discount on the purchase price.
I brought it home and replaced the impeller. Then I couldn't get it to pump water on muffs in my driveway either. After a lot of checking, head scratching, short runs and stops, and about 2 hours of screwing around, it was pumping warer with gusto. Here's what I learned:
It's hard to fit the lower unit in a barrel if the previous owner installed a hydrofoil.
It's hard to run it on muffs, I think because the pickup hole is pretty tiny. You need a lot of water pressure, a really good seal on the muffs, and the kind of muffs that feed water to both sides of the lower unit. I have very high pressure city water at my house. Other places it may just not be possible to muff this motor succesfully.
It takes a little time for the thermostat to open and start discharging water. Those are harrowing seconds when you're not sure if the impeller is working. I go by feel - if the cylinder head is too hot to touch for more than a few seconds, time to shut it down and cool off.
At idle, the thermostat will cycle the water discharge on and off - you can feel the cylinder head getting hotter and cooler as it flows water or doesn't. While it's under power and pushing a boat around, it discharges water continuously.
I had to pull my lower unit off recently for another reason and checked the impeller. It still looks fine, no sign of burning. So I must've gotten enough water to it to lubricate it, just not to pump properly.
So I think you'll find you're good to go after the barrel test.
