The last webmaster had a lot of the sites linking to each other
Have you confirmed if any of the sites have suffered from penalties? Are all sites EMD - for example, blue-widgets-for-sale-in-denver.com and titles/anchors with a strong bias towards "blue widgets for sale in denver" ?
it would be easier to rank micro sites quicker than one giant site for several cities
From my personal perspective, I'd disagree with this statement completely. It's much easier to rank one big valuable site than dissipate the time and resources to several weak sites.
The benefit from guest blogging would be for the links of course
The main benefit from guest blogging is the so-called secondary links. So you really need to pick guest blogging partners that have popular legitimate sites and a large following on Facebook and Twitter. That way when you share amazing content via a guest post, it gets shared to lots of people who can then in turn choose to link to you naturally.
Guest blogging should be used predominantly to build your reputation as an expert in your field.
To answer the question whether 100% of the guest blog links have to be nofollow, erm... the best thing to do is search YouTube for Matt Cutts videos where he speaks about guest blogging and read between the lines.
the owner bought them and intends for me to use them
Big part of your job as an SEO is to educate your client/employer (I won't take credit for this, I think it was Robert Charlton who coined this phrase ;) Essentially, if there's a huge gap between what your boss thinks is right and what you think is right, you're both going to be disappointed in the end.
It's difficult for me to speculate without having seen the sites but I'd sort the city sites into two piles - clean ones (no penalties, decent backlinks, some traffic) and dirty ones (penalties, penguins, pandas, EMDs etc etc).
Then build a beautiful national site and 301 the domains from the "clean" pile into the corresponding subpages of the national site... unless, of course, the 7 sites you've picked has got amazing traffic and recognisable brand value...