At Pick Up, or at their next request?

Because she is your friend I would think it would be a bit easier to tell her that her dog ended up not being a good fit in your house. As we always say, put the blame on yourself and tell her that because of your home setup the dog was nervous and was acting out in a nervous or fearful way. Tell her that you think he would be better off with a travel sitter.

I had a similar situation and I had to refer my client to a travel sitter I know. She tried her out and she called to thank me. The dog did much better in his own home. In my home he barked and whined NON-STOP it drove my whole family crazy. I really felt bad for my husband, he was miserable. Now the dog doesn't come to my house and everyone is happy including the dog. I am convinced that not all dog belong in a home environment. Luckily we have different options on how to board our dogs, besides sending them to a kennel like years before. I would tell her this when she picks up her dog, no sense in worrying her now.

I agree to tell her sooner rather than later, and more specifically, to tell her what he DOES need to succeed and be comfortable in a boarding environment (ie a quiet household, no kids, someone who is able and willing to provide him with a safe place to adjust). I rarely, if ever, think of the incompatibilities we face as the dog's problem anyway. It's not necessarily anyone's problem; it's simply a bad fit. Even the worst behavior is just a matter of perspective, and may be no issue at all given the right environment. The important thing when discussing it with clients is highlighting why it's a bad fit for the dog rather than a bad fit for you (even if it's both). I'd even point her to this post if you're looking for something to say, because I think you said it perfectly for us. You clearly care about her dog's wellbeing and you're being completely honest about his ability to succeed in your environment.

In this specific situation, where this owner is a friend (outside of/beyond Rover) , she's aware of the issues, and you feel this dog can get what he needs in another environment, I'd suggest letting her know sooner - so she can work on it after she returns, rather than waiting for her next request, which you'd turn down.

On the one I had to, I unfortunately told them when they tried to make their next booking (the dog, as he got comfy, tried to go after my cats aggressively). Luckily, they were not angry or rude about it. But I should have probably said something when they picked him up...I just never expected them to be repeat clients.