Do I back up the watch before I unpair it from the iPhone 7?

When you unpair the watch a backup is automatically made and uploaded to the cloud and when you pair a new watch with your phone you can restore the phone from this backup.

Follow these steps to remove the old watch from your phone;

Remove Activation lock

Yes, but according to: Back up your Apple Watch - Apple Support

"Apple Watch content backs up automatically to your companion iPhone, so you can restore your Apple Watch from a backup. When you back up your iPhone to iCloud or iTunes, your iPhone backup will also include your Apple Watch data."

"When you unpair your Apple Watch from your iPhone, your iPhone automatically creates a backup of your Apple Watch. Unpairing will erase all data from your Apple Watch. If your Apple Watch is unpaired while out of range of your iPhone, the backup might not have the latest data. When you're ready, you can pair your Apple Watch again and set it up from a backup."