The latest Google algorithms penalized websites for "un-natural" linking characteristics and the truth is natural links are difficult to come by, especially for local business sites. But they are NOT impossible. All things being equal, you will kick the pants off your competitor's website if you do this.
Basic linking strategy for local business websites
1. Links should be relevant. Who you should link to is probably better than who you can get links from. If you're a caterer, you should provide links to businesses you recommend in the events and wedding categories (and possibly restaurants and other food services).
2. Don't provide links to your competition. While this may appear as a positive relevant link to Google, two things may happen. First, your competition may not want to reciprocate.Second, you could be losing a prospect to another business. That's just dumb!
3. Links should be honest. You should not link for the sake of linking. This is what got a lot of websites in trouble. Instead, link to businesses that you would truly refer your best customers to.
4. Links should be reciprocal. Why would you link to someone who is not willing to link to you? Reciprocal links also have a way of eliminating links to your competitors. If you're a caterer, you're not likely to recommend another caterer, nor are they going to want to link to you.
5. Link to businesses that will recommend you exclusively. If you provide a link to a site who links to a lot of your competition, you are possibly creating doubt in the minds of your visitors relative to choosing your services or not.
6. Link to people you know. Consider a link as a personal reference to another business that you can vouch for. This implies that you actually know something about that business. The best place to look for links are businesses in your direct circle of influence. Are you in a business networking group? How about your LinkIn connections or your other social media connections? These are great places to start.
7. Use correct syntax when linking. If I link this way: Best Caterer In Dayton Ohio vs. click here, or http://www.lmrcatering.com which link provides Google with ammo to rank the recipient for "Best Caterer in Dayton Ohio"? It's obvious right? Make sure that people who link to your site do the same. Just saying click here or just linking your URL is not as effective as using keywords in the hyperlink.
8. Have a business partners page. Don't link from your home page...it's too important. You will most certainly help the person you're linking to but at the expense of your own traffic. It's just not good practice.
The bottom line is linking takes effort but it's that effort that will set you apart from your competitors. If you go down this path, start with a linking plan. Write down the names of businesses that you truly would recommend to clients and then do the research. Ultimately you or your SEO guy will have to contact each business to setup a link and a reciprocal link. Focus of quality over quantity. Do this right and you will be able to literally dictate the search terms for which you will rank on Google.