Participatory design is a great way to have an engaging conversation with users about a particular task or situation. The main thing to remember about participatory design is this obvious point: Users aren't designers. During the design session they are going to sketch out screens and workflows, but those artifacts aren't important: the thoughts behind the designs are.
My best practices:
It's a conversation, not a classroom exercise.
Don't look at participatory design as an assignment you give your "students." Consider the design activity an opportunity to have a conversation about the design problem/scenario. You need to do X – how would you see doing X? What process makes sense to you? If you need to enter information to do X, what would it be?
Be clear about the problem space/scenario.
Your time with each participant is important and valuable (they are taking time out of their personal and professional lives to meet with you). To get the most out of that time you need to be clear about the design problem and scenario you will be working on with the participant. Keep that description simple and obvious, to prevent confusion and ambiguity.
Again, don't judge the designs or the participants – many of them will be very self-conscious about their design and drawing abilities. Don't criticize, even in a joking way. Be positive. And there are no bad ideas… even if the participant comes up with a contraption that would embarrass Rube Goldberg, don't let the participant know that.
Encourage, but don't patronize.
While you shouldn't judge, you also shouldn't be condescending. Be positive and polite but don't overpraise – it can come off as phony and turn off the participant.
Have someone take notes.
Have an assistant to the side take notes and (optimally) video and audio record the session. If the participant is not comfortable being recorded, just take notes. But the key is to capture as much of the conversation as possible. As the facilitator, you shouldn't be trying to capture everything as you go, you should be responding to the participant – again, it's a conversation.