uggh e12 overheating problems

the true crux of e12 cars.
the overheating problems are usually caused by a lack of cooling system maintenance and usually the water pump is the first thing to go (the impeller acts as a sacrificial anode much like an outboard boat motor has) then the passageways inside the head go.
the early m30 engines (like yours) did have problems with cracking cylinder heads. if you end up going the head gasket route, and its an easy job, put the head from a later model engine that has the updated coolant passage design. Also, if you have the reactor exhaust manifolds (huge) still, ditch those to basically eliminate the cracked head problem. They hold huge amounts of heat in and that is what causes the head to crack.
you can direct swap in some from an euro spec e12 (try firstfives.org) or ones from an m30 powered e28 will also work but you may have to have the downpipes reworked to connect. (i've got a set from a euro 535i if you need some of those)
As far as the hesitation... check the air boot from the vane air meter (mass air meter to most) to the throttle body. if it gets cracks you'll get all kinds of weird stumbling, hesitation, and otherwise poor running conditions. it can also make the engine run lean and cause overheating problems.
secondly, check all vacuum lines. especially the seal around the oil dipstick, it is often overlooked and many times the source of a massive vacuum leak. These cars run under a crankcase vacuum system and a leak anywhere will cause problems (with the car idling pull the dipstick out or remove the oil fill cap, it stumble badly and should actually shut off. if there is no change in idle or a very minor change, start looking for vacuum leaks.)
the third place is in the vane air meter. take it off the car and turn it upside down. you'll see a plastic cover. carefully cut the rubber seal around its perimeter with a razor knife and use a flat screwdriver to open it up. look at the traces inside for deep wear marks. It the carbon trace gets worn through or thin in any spots, it will create all kinds of problems.
Also, since this is an l-jet car, do check the timing. it will most likely not be off but it is a good idea to check it.
hope this helps some and i'll be glad to offer any assistance i can.
I'm on the east coast (SC) but i do have 1 e12 and many e24 and e28 parts cars lying around that i can get things off of for you.
good luck with it,
al525i
1985 euro 525i m-reg
p.s. the funny sound thing is probably that the l-jet injectors are audibly loud and also the m30 is a solid lift cam engine so the valvetrain makes some noise. A valve adjustment would be a great idea for this motor and it is easy to do.
p.p.s get a bentley manual for the car. chilton is crap. it will be the best 50 bucks you ever spend on the car.