Fortunately, the procedure isn't too complicated and requires only uncommenting some lines in appropriate setup files.
First the GRUB setup:
Open file /etc/default/grub with your favorite editor and make sure that is contains following lines:
GRUB_CMDLINE_LINNUX="console=tty0 console=ttyS0,9600n8"
GRUB_TERMINAL=serial
GRUB_SERIAL_COMMAND="serial --speed=9600 --unit=0 --word= --parity=no --stop=1"
Some of the above lines may already exist and need to be modified or may need to be completely added. They should also be modified to match setting which the terminal is expecting and to which serial port the terminal is connected.
Next is the /etc/securetty file. Open it and make sure that serial ports which will be used are on the list. If they're not, add them there.
After that comes the /etc/inittab file Open it and uncomment the line at the bottom:
T0:23:respawn:/sbin/getty -L ttyS0 9600 vt100
This line may also need to be edited for appropriate settings such as terminal type, speed and serial port.
After this, the bootloader needs to be updated. Command update-grub will compile the settings for grub and reinstall the bootloader. After this the system should be set.
BONUS POINTS I'm using VMware on Windows 7 host and after all this, it's not working! What should I do?
Make sure that named pipes are working properly. For that, Sysinternals program pipelist.exe is useful here. It can be obtained from here. With default settings after Windows installation, it won't list the pipes and will instead crash. If that happens, goto Control Panel->Programs and Features-> Turn Windows features on or off-> Microsoft .NET Framework 3.5.1 and enable Windows Communication Foundation Non-HTTP Activation, restart and named pipes should now work.