The wizard who condones chicken fighting.

[Fizban]

Problem: on the off chance your familiar dies in the ring, you lose xp.

Solution: use either homunculi, other constructs, or a prestige class that replaces your familiar with a different companion that is more easily replaceable (such as Elemental Summoner or Master of Shadow). Although we lose the point of it being a familar, we open the door to a lot more variety of competitors, including all manner of companions and constructs.

I don't think there's anything stopping you from adding grafts to a construct either. Trick out your base quadraped of choice with rock launchers, chainsaws, and anything else you can pull out of your planar binding.

For familiar spells, I suggest Bite of the WereX, the polymorph subschool, and Imbue Familiar with Spell Ability. Imbue whatever spells might be useful in advance, spend one round buffing with the polymorph (swift) and Bite. Assuming only 6th level spells, your familiar now has the stat block of a young red dragon. Including breath weapon, 6 attacks, an extra +12 strength, net +7 to AC, and (assuming CL 12th) four 4th level spells of your choice in it's belt.

Actually, just Imbue Familiar with Spell Ability. That will tear through any familiar that doesn't have it, because it means your familiar is now actually a wizard.

Might I suggest laying some ground rules for this arena? If buffing is unlimited, it's really just a caster fight by proxy. If you actually want to stress the upgrading cybernetic familiars aspect you might want to impose a full dispel upon entering the arena.

As for grafts: I suggest ignoring the new grafting rules from Magic of Eberron/ Races of the Dragon. The grafts already costs double the base price, as is proper, you really shouldn't have to pay permanent hp and ability points for them, and limiting people to one type of creature is just mean. You should impose a limit on how many though, the stated 5 is good.

Perusing grafts: Vampire Fangs from Libris Mortis would be impressive if the chicken can grapple well. Nothing interesting in Races of the Dragon unless you absolutely must have it breathe fire without help. Lords of Madness is where it gets interesting: mucous projectors, [fast] healing blood (very expensive), and the silithar heart for emergency healing. Finally, the Fiend Folio has the most selection, but also the oldest, and most wonky pricing. Choices include wings, tails, tentacles, and the rock launcher.