Rebuilding C5 site

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I am rebuilding in a C5 website.

Basically it is going to look and function the same but I need to strip it right back and remake the theme whilst streamlining the sitemap in the dash board.

Also I cannot seem to update C5 on our server only on my local in which is the location of where I will do the rebuild.

So should I make the theme and merge the database and images or attach the new theme to the existing website and clean up the sitemap?

1.Rebuild and update theme C5 on local machine
2.Upload a fresh install of C5 and attach the theme onto a testing environment
3.Download sql database and images from media library on production server only (minus core c5 files and theme files
4.Add the SQL database and media library to this server for the content and images
5.Test and implement onto production server

Or

1.Mirror and copy the existing website onto a testing server
2.Create a new theme on local machine then activate this via the dashboard on the testing server
3.clean up the sitemap?