Holy cow.  This is a pretty wide-ranging question, so I’ll try to answer the best way I can.  

For national shows, the band’s booking agent generally reaches out to me and says “Hey Nate, please hold these dates at this venue for this headlining band.”  While I’m holding the dates, they put together a tour package, and then ask me for an offer, based on specifications they provide (ticket price, catering budget, etc).  I put together an “offer sheet”, which is a lot more than just an amount of money.  It breaks down every detail of the show, from how much I can spend on advertising to how much I can pay all the bands (including the locals).  They compare all the offers they receive from promoters around the area, and they take the best offer.  Other things come into play, like personal relationships between bands and promoters, history (i.e. which promoter the band has worked with in the past), and general availability of the venue).  We then negotiate the deal, confirm the details, choose an announcement date, and start promoting!  

For local shows (and local openers on national shows), we simply look for talented bands that are hard working, draw a good crowd, and have the right ethic to fit the theme of the show.  

If you have more specific questions, please ask!