Re: "Facebook would be better if it were to target people in a specific location geographically." Wouldn't that be the case for all small businesses?
It's almost instinctual for people to want to share things that have played a part -- large or small -- in adding to their quality of life. That being said, I don't think it depends on the what type of service the small biz offers, nor the audience that it panders to. Especially not the latter because whether you're selling aardvarks or zyzzyvas, if someone enjoyed their experience purchasing said aardvark or zyzzvya, they'll naturally be inclined to share.
That being said, I'm not exactly sure your last question fits into the equation. Even if the small biz generated most of its clients through mediums like direct mail and the like, that fact alone makes little impact on if the small biz should advertise via social media platforms like Facebook.
The question really boils down to whether or not Facebook ads (being that they're display based) is a better option for small businesses over Adwords, due to the inherent fact that Adwords allows the small biz owner to target specific keywords that essentially act as pre-sell for whatever product or service they offer.
I see a lot of small businesses advertising on Facebook, but mostly for businesses that are no where near where I live. A lot of people would quote the fact that there aren't many small businesses advertising on Facebook as evidence that Facebook is not a good platform for generating customers. I'd say that's more because people are unaware of how to successfully create Facebook ad campaigns to generate those customers than anything.