Web developers are just like any other professional.
There are varying degrees of skill level, what they can accomplish, and pricing.

So you've decided to bite the bullet, and have a website built for your business, but how do you choose someone amid the miriad of companies out there?

Here are a few factors to take into consideration.

1) Location
Are they close by? Are they close enough to organise a meeting with and chat face to face? Ultimately, this is what you want. Someone that will take time out of their day, to sit down with you and discuss every aspect of your requirements.
Sure overseas, or interstate companies can be cheaper, but you simply cannot convey your visions for your project over the phone or through emails.

2) Their Portfolio
Do they have one? How many projects have they worked on? Have you seen the work that they have done before?
This is important. You want to know that the developer you choose, can handle the task at hand.

3) How long have they been in the industry?
This is another important one. If it is less than 5 years, then move onto another company. You DONT want to hire someone who just started building websites. You are ultimately looking for someone who has worked for other companies in the past, and has experience with a multitude of environments.

4) How long will they be around for?
This is a doozy. You REALLY DONT want to hire someone who will not support you a year from now. Otherwise you will need to do your research all over again, when that time comes. Will their servers be up in 12 month's time?

5) How do they build their sites?
If the answer is, "I use frontpage", then please move on. If the answer is "Exclusively in Dreamweaver", then move on also.
While these tools can make life easier for a web developer they are riddled with bad code, that will need to be cleaned up later.
Websites should be Web Standard Compliant, so your web developer needs to be able to adhere to the standards, and understand HTML and associated web technologies thoroughly.

6) Can they build advanced functionality?
This is a very good question to ask. Most web developers worth their weight are able to offer you additional functionality for your website, not just a static page.
They specialise in a specific web language, and can build pretty much anything you want, themselves, and not rely on open source software to provide you with additional tools.

7) Do they outsource work?
Be careful with this one. Whilst there are legitimate reasons for outsourcing work, some companies outsource to poorer nations in order to lower their overhead, and increase their profibility from your project.
If they are farming your project off to someone overseas, you want to run. I'll say no more on this one.

8) Do they have experience with search engine optimisation?
You can't just build a website, and automatically have visitors. A website needs to optimised for search engines both on-site and off-site to stand a chance against the competition.
Always ask if your web developer if he/she keeps search engines in mind while building a site.

9) Can your web developer grow with your business?
There are many examples out there of businesses getting websites at a 'small business' level. But what happens when your company gets larger? Needs additional tools?
Make sure you're web developer has had experience, and is confident that he can handle higher traffic and building on a corporate level.
   
10) Can you get through to your developer at all times of the day?
Servers crash, email systems go down, accidents happen, every day, all over the world. This is normal. Make sure that your web developer is contactable at all times. If your site goes down, and it is something that you rely on for your business, you don't want it to go down for long.

11) Are they affordable?
This is a double edged sword. On one hand you can get developers cheap that are horrible, but you can also get some really good ones. It all depends on their situation.
Sometimes, it just may be worth it to spend a little more money, to get what you really want, not what that cheap developer says you can have.
If they are putting a restriction on how many pages you get, best to avoid them.

I may add more to this as they come to mind, but for your convenience I've also linked to some related articles below.

Enjoy!

Related Articles

10 Things Any Web Developer Worth Their Spit Should Know ~ search-this.com
10 Things Every Good Web Developer Should Know ~ jonraasch.com
10 Basic SEO Tips Every Web Developer Should Follow ~ devmoose.com
Key Qualities to Look for in a Web Developer / Designer ~ biznik.com
9 Signs You Shouldn't Hire THAT Web Guy ~ davidwalsh.name