I fear losing conversions due to our 7 year history and already established brand awareness. I also fear transferring all the penalties over to the new domain.
Good thoughts! I would feel the same way.
Third:
This is what I would go with and I'd start by going through the site with a very fine-toothed comb, including the HTML coding.
One of the "craziest, are you kidding me?" things I've found with a site hit by Panda
[it was a site I initially built from scratch and later sold, then came back to] was some of the "legacy coding"
[if it ain't broke, don't fix it] pages that *always* ranked well were the issue.
The TL;DR is: there were places where lists of "things" were coded with <p>intro <br>phrase 1 <br>phrase 2 <br>phrase 3, etc; rather than <p>intro</p><ul><li>phrase 1 </li><li>phrase 2 </li>phrase 3</li></ul> -- Within two weeks of changing the coding from "looks right to visitors using <br>" to more semantic HTML
[hey, SE algo, this is a topical list of things], the site went from one page only
[the home page] indexed to well back on the way to the whole 12,000+ page site being indexed. Keep in mind, the visual presentation did not change significantly in any way, only the HTML did.
I don't "push" correct HTML coding for no reason, or even for my benefit. I do it because I have experience with how ugly the downside can be when what should be
[and looks like] a list to a visitor, looks like or could be interpreted as "keyword stuffing" to an algorithm -- Been there, done that; It's ugly and the issues can be very difficult to find, because in the case I'm referring to the issue was in the HTML, not the text or presentation of the text to visitors.