We looked at my closest family & friends (DH is an only child, and his parents aren't capable of handling raising another child, & we both agreed on that 100%).
Our "potential candidates" have kids, and we looked at how they treat their kids, over time:
* Do we like the way they treat their kids?
* Do we like how they discipline them (do they discipline them? In my one brother's case, the answer is no, so that struck them from the list).
* Are they tolerant of other views/openminded people?
* Do they seem like they could handle one more child?
* Do we think they would love our child as their own?
* Are there family politics that need to be considered? (In our case, yes, but they aren't enough to sway our initial feelings).
These questions have helped us to narrow it to 2 families, and we're still trying to decide between them.
One thing to keep in mind: whomever you decide now doesn't have to stay on the list. As your child's needs and passions change, you may want to rethink the choice later, and have it put in your will later. The perfect guardian for your toddler may not be the perfect guardian when your children are 10 and 12 years old. So it's a good idea to revisit it every 2 or 3 years.
Also, you do not need to announce to anyone in your family or among your friends who you picked. You might want to just keep it private between your choice and you/your DH. Do be sure to talk to the people you want to be your kid(s) guardians now, though. And don't be offended if they say no--its a huge responsibility and should only be entered into if they are 100% comfortable with it. So have a 2nd choice, in case your first choice declines the honor/responsibility.