I replaced the outboard on my 240 last year. 20" is the minimum on my boat, but I was asking myself the same questions about 20" or 25". Since I do only inland sailing, I went with Crazy Dave's advice (always good!) and decided on the 20". I don't have any problems with the prop coming out of the water, but again that's only on inland lakes.
I went with the Mercury 8hp with electric start and absolutely love it. The motor sits pretty far back on my boat too, so having throttle and shift on the motor tiller handle makes it so easy to use. The built in alternator is great for keeping the battery charged. The motor runs very quietly and coming into the slip is a breeze with these controls. And, I have plenty of power to move the boat when I need it.
Again on Crazy Dave's advice, I chose Mercury over the less expensive Tohatsu because I have a local, certified Mercury dealer to service it (but not Tohatsu). I went to my local dealer to order the engine, but he wound up telling me that I'd save a lot of money ordering it from Online outboards or Bass Bro. He said he'd be happy to service the motor for me no matter where I bought it from. A very honest, upfront guy. However, I've heard of others who have had trouble getting service when purchased online. So, I'd definitely start by talking with a local guy.