Frankly, any Digimon representation may have to wait. Digivolving during battle may be an interesting concept, but to keep everyone balanced in the world of Smash Bros. can be a tough task to do. I guess one idea could work as follows...
You'd start the match as Agumon. Unique to Agumon is a Digivolution meter, where whenever it's full, Agumon can Digivolve. To build up the Digivolution meter, Agumon has to deal damage to his opponents, but the meter will decrease if he takes damage. When the meter is full, Agumon can Digivolve into Greymon. And if you repeat the process as Greymon, he can Digivolve into WarGreymon. However, taking too much damage or getting KO'd can cause Greymon to revert back to Agumon, and WarGreymon back to Greymon.
Agumon would be the quickest of the three, but his attacks are not all that strong, and is rather easy to send flying. Greymon would be the balanced form, sacrificing some mobility to increase his attack power and weight. WarGreymon would be the strongest and heaviest of the three, but his attack speed is on the slow side.
If the Smash Ball is acquired, Agumon or Greymon would instantly Digivolve into WarGreymon, and then perform Ultra Tornado. If the player is already WarGreymon before acquiring the Smash Ball, then he'll simply perform Ultra Tornado instead of Digivolving. However, using the Final Smash will cause WarGreymon to revert back to Agumon, due to its sheer power requiring a lot of energy to use.